2022 to be a transition year with earning growth gaining momentum: Mahesh Patil

Be wary of companies where valuations are frothy and earnings certainty is not as strong. Apart from that, I really do not see any sector where one should be too negative. Now the stance will be more pro domestic cyclical as opposed to global cyclicals last year, says Mahesh Patil, CIO, Aditya Birla Sun Life AMC.

2021 was a grand year for the market. Will 2022 be a flat year or a decent year?
I think 2022 will be a transition year where we will move from say easy liquidity, low interest rates to an environment where slowly the liquidity will come down and rates will move up. There will be a policy normalisation. Last year, the markets went up purely on a risk-on rally and earnings were catching up.

This year, we will see earnings growth gaining further momentum and the markets will probably be more discerning and try to identify where the risk-reward is more favourable, but it should be a decent year. It will not be as extravagant with the one-way rally that we saw last year. There will generally be ups and downs in this calendar year but in India, I am very positive in terms of the way the recovery will pan out, not this calendar year alone, but also over the next three to five years. I think India is at a cusp where the whole recovery will be driven by multiple factors – investments starting to pick up and discretionary consumption improving.

Even on the export front, India will do better than what it has done in the past. There are multiple pillars to that growth, which will sustain going forward. This will be a more sustained recovery from here on and what we should be looking at. It is good for long-term investors to stay put and ride that.

Where are you picking your spots? Where is the market still reasonable and there is scope for both earnings and PE expansion?
In the financial sector. The earnings growth will be fairly strong in the next fiscal year and there the valuations of some of the leading players both in the private and public sector are somewhere near the long term average or a tad below. Financials have underperformed last year on the back of concerns about various disturbances because of Covid, concerns about NPA and slower credit growth.

All this will start to improve going forward. So clearly that is one fact where one sees not only good earnings growth over the next couple of years, but also where valuations are more reasonable. While there will always be differentiation over there with the better managed banks which are more technology focussed, but clearly see that space doing well.

Apart from that, pharma is a defensive sector. Pharma has underperformed again last year but the risk reward again looks fairly decent. Earnings growth should be steady. The US market has seen pricing pressure which is abating now, The domestic pharma should do well and valuations are somewhere near the long term averages.

There are some pockets like utilities, oil and gas, where the valuations are attractive but probably the growth outlook is not as strong.

If the crux of the market is centred around earnings, how should one approach the pro inflation scenario? Is it time to align with pro inflation trades – real estate, metals, commodities?
So while inflation is no doubt high currently, we think it would start to ease off in the second half of this calendar year. The supply side bottlenecks which were driving inflation are slowly getting addressed. Overall, global growth last year was very strong. We have slowed down a bit and so the pressure on that side will ease off. As a result, while inflation would remain high, it would not be at the same level as what we saw in the last calendar year.

But by and large, the pro-inflation trade, whether it is commodities or real estate, should continue to do well, especially real estate. We are seeing the beginning of a new cycle in real estate. The overall environment in terms of interest rates and affordability is firmly in place and that should continue to see that the sector does well in the coming years. Commodities are also fairly steady. While China growth slowdown is a concern, we are seeing a lot of capacities being shut down on the back of China’s carbon neutral policy.

So the demand supply balance is fairly well balanced over there and we do not expect prices to go up further. But prices should remain fairly steady. In that scenario, commodities like metals should also be able to report steady growth. In that context, we would expect inflation to drive higher from here this calendar year.

What should one exit or sell just given the way things are?
Selling is always a difficult call but I would consider stocks where valuations have become very expensive and there is some amount of uncertainty. The whole liquidity driven rally which took everything in the market up without differentiating will give way. So irrespective of sectors, one should be wary of companies where valuations are frothy and earnings certainty is not as strong.

Apart from that, I really do not see any sector where one should be too negative, even consumer staples where the growth has been slightly weaker and valuations are expensive. The stance will be more pro domestic cyclical. Last year it was global cyclicals. This year, domestic cyclicals will stand out.