We are still in a bull market; don’t cash out completely: Mahesh Patil

“One has to be a bit cautious and not aggressive. Any incremental investments can probably be done and spread out over a period of time. Given this kind of dilemma between the near term outlook and the still positive longer term outlook, I would say stay invested,” says Mahesh Patil, CIO, Aditya Birla Sun Life AMC.

Would you say that at least the retail participants out there are slightly safer right now sticking with largecaps or would you say that is not quite the story? Or would you go more for a bottom-up story?
You are right about that, it is more a bottom up and so not necessarily about midcaps, smallcaps or largecaps though I would say that largecaps would slightly be in favour at this point in time. Midcaps and smallcaps have seen a correction but they are still being buoyed by liquidity which has come in from the retail investors and that could be tested in this market environment.

We have seen some kind of cracks over there but the way things are unfolding, one could see some meltdown over there if the retail investors really panic. A lot of the retail investors who have come in the last couple of years, have not seen a large correction and how they behave in this environment is yet to be seen. We always know that whenever there is a selloff, the undershoot on the midcap and smallcaps can be much larger.

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So given that, I would be biased over largecaps but one can still look at stock specific smallcaps and midcaps where the outlook or the story is fairly strong. I would say market cap agnostic at this point in time; if at all one has to have a tilt then largecaps are better placed at this point in time.

While there will be a bias towards largecaps especially in case of volatility and uncertainty, in at the broader markets we have seen a big correction. Certainly those frothy valuations are not looking as frothy anymore?
That is true, they are not as frothy as they were earlier but one has to understand that once you are prepared for undershoot on the downside because of smallcap and midcaps, they will be driven more by retail money and that is where we could see some kind of a withdrawal in the short term if the market continues to remain weak. One should be prepared for more downside if at all the situation worsens from here.

But otherwise, for long-term investors, the valuations there are also fine and so one should not look at mid and smallcaps and continue with the asset allocation. In the overall portfolio, continue to maintain the asset allocation towards mid and small cap stocks. There could be some earnings downgrades in the mid and smallcaps or even for the largecap for that matter but mid and small cap would probably be much more sensitive. So, one needs to be slightly more cautious over there.

People have lost money in this market. Is this the time to take cash off the table?
I would not say that it is time to take out cash because I am still not really negative on the overall medium, long term outlook. We will come out of this and the India story still looks fairly strong. It is very difficult to time the market.

Even if you cash out over here and there is a correction, the recovery from that will be equally sharp and for investors to cash out and then get in it is very difficult. I would say one has to be a bit cautious and one should not be aggressive. Any incremental investments can probably be done and spread out over a period of time. Given this kind of dilemma between the near term outlook and the still positive longer term outlook, I would say stay invested.

If one has over invested in the market and has overshot the target equity allocation, then one can probably take some gains over here but I would not say that one should cash out and wait for a deeper correction. I firmly believe that we are still in a bull market. This is a correction that we are seeing in the larger bull market. And from that perspective, it would not be wise to really cash out because the markets can bounce back sharply and one would not be able to catch up with it.

Since you do believe that this is a deeper correction and the bull market is pretty much still intact, would you say that regardless of it all, one has to lower return expectations for the year ahead?
Yes, I think that is true, even when we came with our annual outlook, we said that this year is going to be a year of transition where we will see normalisation in terms of policy environment in terms of the overall market valuations and that is what is playing out.

With the other headwinds that have surfaced, this is going to be a year for consolidation and return expectations will be muted obviously because of the market volatility. If one is able to get in at a lower price point, the returns will be slightly higher but by and large, this year the market could test one’s patience and one has to be really patient, stay invested, keep the longer term picture in view and at the same time not get carried away by the short term variations in the market.