Edited excerpts from a chat:
The mood in the market seems to be swinging in between the two extremes of greed and fear very quickly depending on the news flow coming in from the White House. How are you handling this period of abnormal volatility? Did you tweak your portfolios well before the meltdown began?
The noise around the market because of the US tariffs and global geopolitical risks has increased, and that is resulting in a lot of volatility. However, we are sticking to our process InQuBe, where when we analyze the fundamentals of companies, we have our internal quant team, which helps us via various quant screeners. And also, last but not least, we have within our investment process something called a behavioral edge, which helps us understand and benefit from market biases much better. So all these things are ensuring that we are looking at the longer term and not getting swayed by the near-term noise. As far as portfolio tweaking is concerned, in June-July of last year, when midcaps & smallcaps were clearly showing signs of frothy valuations, we reduced that exposure purely on valuations.
What’s your current asset allocation mantra? Are you playing defense with value or offense with growth?
The recent market correction in equity is offering a good opportunity of investment for long-term investors. We are focusing on the quality of business and valuation comfort. We are also looking at long-term tailwinds emerging for various businesses & sectors, which we call megatrends. To create a portfolio from a medium-term perspective, we believe investors in equities should have portfolios that have domestic consumption, domestic healthcare, large cap tilt, and quality as key attributes in the portfolio.
Within your portfolios, are you tweaking cash levels or doubling down on equities on every dip?
We generally don’t take cash calls. We look for opportunities to buy good businesses at fair valuations. The recent correction offers such opportunities. More in large cap space and fewer in mid & small caps as well.
If you had to pick one sector for FY26, which one would you be backing and why?
We believe in FY26 domestic-oriented sectors, especially mass consumption, and companies focusing on rural consumption should do well. Even domestic pharma is the space that could do well. The domestic also includes financials, which we are keenly looking at. So overall, companies on domestic growth, domestic consumption, and benefiting from the uptake in domestic demand is something that we are looking at very keenly.
One view on the Street is that all export-facing sectors, whether it is IT or pharmacy, will face trouble in the days ahead. Are consumer stocks the only defensive bet left in the market at this stage?
As said earlier, all the domestic-focused businesses are better placed compared to businesses that are focusing on global growth and the Global economy. Within IT and pharma, we believe IT can face a little more higher headwinds if the global economy slows down. Pharma is a defensive play, but the noise around tariffs on pharma is something that can keep the sector volatile. We will assign a low probability of very high tariffs on pharma because of the importance of the product to the local populace. But as I said earlier, domestic-focused businesses, including financials, are something one should keenly look at this juncture in the portfolio.
If the trade war gets limited, by and large, between the US and China, what kind of impact do you see on EM flows? Will India become more attractive for FIIs, or will the entire EM basket suffer?
One should understand that the US and China, both put together, are more than 40% of global GDP, and if they enter into tariff wars, the whole global growth could slow down, so there could be an impact on India also. However, the FPI outflows in the last 6 months and the resultant valuation correction offer comfort to global investors. Also, the growth differential between India & other larger economies should again increase. So clearly our view over here is that Indian equity should outperform from here on compared to US or China equities.
Which is that one data point that matters the most at this stage – bond yields, dollar index, Dow Jones, or Q4 earnings?
It is very difficult to pinpoint one single factor that drives equity returns. I believe some of the very important factors definitely would be the dollar index, most risk assets are quoted in USD. So, it is a very important metric to watch out. Bond yield both in the US and India is something that we are looking at very closely as it represents the risk free rate.
It is the earnings growth that drives equity returns over a long period of time. So, Q4 earnings are important. More so, management commentaries on FY26 business outlook will be very important from the companies.
