Edited excerpts from the conversation:
Equity investors are now worried about the impact of the Iran war which comes at a time when the market has not made any kind of return in the last 18 months. Besides sustainable SIPs, what is the best solution to tackle this dilemma?
The recent escalation of geopolitical tensions in the Middle East has added another layer of uncertainty to Indian equity markets, which have made virtually no return in the past 18 months and have underperformed many global peers. India imports a significant portion of its energy needs, particularly crude oil, and significant increases in oil prices have historically been negative for the domestic economy and markets. Apart from its energy dependence, the Middle East is also important for India in terms of trade and money, with the large number of Indians employed in the region contributing significantly to revenue. Given this relationship, it is natural for Indian markets to react cautiously to geopolitical instability in the region.
However, much will depend on how quickly the situation stabilizes. Historically, such geopolitical tensions tend to be short-lived and, incidentally, often prove to be good entry points for long-term investors.
In our view, the best way to navigate such phases is to invest in the market rather than aggressively demand it. After an 18-month period of correction, equity values moderated from relatively high levels, and markets were already expecting a catalyst for earnings recovery before the latest hike. If the situation turns relatively quickly, markets can recover quickly. Maintaining a long-term perspective and a disciplined approach can help investors take advantage of such opportunities.
How do you deploy cash in a portfolio during falling stock prices?
We generally do not take large cash calls in our portfolio. However, at the margin, we are placing cash in the current phase of market correction, which will bring our cash levels below the average level across the portfolio.
Such adjustments also provide an opportunity to restructure the portfolio by increasing exposure to potential winners while reducing laggards. We make these portfolio adjustments where appropriate opportunities exist.
Which sectors look increasingly attractive from a growth as well as value perspective for FY27?
Consumer durables stand out as our clear sector bet for FY27. Many segments within consumer durables remain significantly underserved and therefore offer a long way to grow.
The sector has seen a sharp correction in values over the past 12 months following a period of weak demand due to last year’s mild summer. We believe that a normal summer this year could revive demand, especially for cooling products such as air conditioners and refrigerators.
Beyond this, we expect other segments such as lighting and small appliances to deliver strong growth. Overall, we believe that the sector could witness a combination of earnings recovery and multiple levels of expansion over the next 12 months, which could translate into meaningful performance.
How comfortable are you now when it comes to valuations in the small cap space?
We have been wary of the small- and mid-cap space for some time and have opted for large-caps instead. This position has performed well in recent months, with large caps generally outperforming the broader market.
High valuations in the small- and mid-cap segment were one of the key reasons behind our cautious outlook. While values have moderated slightly in recent quarters following price adjustments and better earnings, they still remain higher than their historical averages.
Additionally, during periods of heightened macro uncertainty, small- and mid-cap segments tend to be more volatile than large-caps. Given this background, we prefer large-caps overall, while evaluating opportunities in the small- and mid-cap space preferably on a bottom-up basis.
What’s your read on sector rotation at this stage of the cycle, specifically banking and finance, capital goods, manufacturing, IT services and consumer spending?
Sector changes in Indian markets have been particularly rapid in recent months. For example, the IT index fell nearly 20% in February even though most other sectoral indices were positive. In such an environment, getting the sector allocation right becomes increasingly important for generating alpha.
At this stage, we have a very positive trend towards consumption and BFSI. In consumption, we prefer discretionary segments such as automotive and consumer durables, as we believe the recent GST rate rationalization has improved affordability and could support strong demand in the coming quarters.
We are also constructive in BFSI especially private sector banks. The earnings trajectory for this segment appears to be on the upswing, supported by a recovery in credit growth, potential margin expansion from current levels, and continued trends in asset quality.
If you have Rs 10 lakh to invest, how would you allocate it between gold and silver, equity and debt if you have a 4-5 year horizon and moderate risk appetite?
Such asset allocation decisions are made by financial planners who can take into account an individual’s unique financial situation and risk profile.
That said, between equity and debt, at this point, we believe equity offers a more favorable risk-reward equation. With inflation likely to rise due to higher crude oil prices, the possibility of further rate cuts by the RBI seems remote at this stage. In the absence of a rate cut, bond yields are unlikely to soften meaningfully from current levels, and so fixed income investments may return largely based on income over the next 12-18 months.
Equities, on the other hand, have already gone through a valuable time correction and look relatively more attractive given strong earnings growth expectations for FY27 and FY28. That said, there are risks to this view. A protracted geopolitical conflict that starts to affect corporate earnings could weigh on equity markets. Similarly, any sustained slowdown in retail flows due to market volatility can also affect equity returns.
Still, we believe that if one has a relatively long-term horizon (at least 3-5 years) equities appear to be in a relatively good position to deliver returns over the medium term horizon and hence on the margin one can consider increasing the equity allocation in their portfolio gradually from here on out.
