Expert view: Harshad Borawake, the head of research and fund manager at Mirae Asset Investment Managers (India), finds broader indices above their long-term averages. He says one should be stock-specific in mid and small caps, and large caps could be relatively better placed at the current juncture. He says his portfolios remain overweight in private banks, healthcare, and consumer discretionary. In an interview with Mint, Borawake shares his views on market fundamentals, key triggers, sectors to watch and the prospects of rate cuts by the RBI.
Domestic markets are at new highs, with a year-to-date (YTD) return of nearly 21 per cent for the Nifty 50 Index and a 31 per cent return for the Nifty Midcap 150 and Nifty Smallcap 250 indices.
Relatively strong macros, expectations of rate cuts, and the upcoming festive season augur well for markets, but growth moderation led by the base effect and high valuations are some of the headwinds.
In this tussle and given the strong market performance in the last two years, one can expect moderate returns in the rest of FY25, and markets can remain rangebound till the earnings catch up with valuations.
Over the years, we have seen that markets act like voting machines in the near term, but in the long term, they are weighing machines as markets are slaves to corporate earnings.
So, regarding triggers, events like upcoming state and US elections will weigh on markets in the near term.
However, the key variables to watch out for hereon would be the pace of rate cuts and corporate earnings growth.
Faster and aggressive rate cuts by both the Fed and Reserve Bank of India (RBI) can keep markets buoyant, but growth, too, needs to hold up.
The US Fed rate cuts, including the recent cut, are always welcome. After all, it is still the most important global central bank.
In the current context, the US Fed is seemingly cutting more to normalize the rate levels/address cyclical eco weakness and not to fight against a black swan event (like the 2007 sub-prime crisis or COVID).
If the Fed continues with its rate cuts and can engineer a soft landing, it will augur well for risk assets in general, including Indian equity markets.
It will potentially bolster risk appetite, and when rate cuts reach a critical mass, even growth may tend to improve, thereby causing a positive rub-off on global growth and earnings.
The noise for rate cuts in India will grow, especially after the US Federal Reserve cut rates this week.
However, we will not be surprised if the RBI waits slightly longer, as it maintains the 'withdrawal of accommodation' stance.
With inflation easing and largely balanced risks on GDP growth, one can expect easing in the medium term, if not immediately.
The improved corporate balance sheets, domestic macroeconomic stability, benign asset quality for banks and broad-based earnings growth certainly warrant higher valuations compared to the past.
Also, valuations should not be seen in isolation but in the context of underlying earnings growth.
Hence, as stated earlier, the sustenance of earnings growth is critical for markets.
At a headline level, broader indices are trading above their long-term averages (Nifty at 21.3 times FY26 Bloomberg consensus EPS) and within that, midcap and small-cap indices are trading at a significant premium to large-cap index and their historical averages.
In this context, one should be stock-specific in mid and small caps, and we believe large caps to be relatively better placed at the current juncture.
Further, there are still pockets of opportunities, particularly in segments like – mass consumption and banking, which offer relatively better risk-reward.
It is futile to time the market, and I wish I could predict either the correction or any up-move.
In our view, one should focus on asset allocation rather than timing the markets.
At the current juncture, I believe that sectors should be more stock-specific than focus on theme-based investing.
Nevertheless, within that, as said earlier, banking, where valuations are 1SD below their long-term averages, seems to offer better risk-reward, though there could be some near-term margin pressures.
Our portfolios remain overweight in private banks, healthcare, and consumer discretionary.
Between FY09 and FY20, the BSE PSU Index M-Cap remained flat at ₹10–11 lakh crore. So, some normalisation was due.
Also, they have significantly improved their profitability and capital structure, warranting a re-rating.
The long-term story for these sectors seems to be very much intact. However, PSU or otherwise, over the long term, any company’s value boils down to earnings visibility, profitability, management quality, and valuation.
So, as long as any company fits into this framework, its market valuation should continue to do well. For PSU, the normalisation trade, in our view, has largely played out, and to that extent, the low-hanging fruits have been plucked.
Hereon, demand/order book and earnings growth must be sustained for a smooth ride.
India enjoys the best macro and micro tailwinds with nearly 7 per cent GDP growth, moderate inflation prints, range-bound crude prices, easing 10-year G-sec yield, stable currency, and resilient corporate earnings.
For the next one to two years, investors should focus on portfolios with quality companies whose valuations are reasonable.
Given easing liquidity but moderating growth, these companies should perform relatively better.
At the current juncture, one should continue to focus on asset allocation, and large-cap-oriented strategies like flexi-cap and multi-cap funds should be preferred.
One may also consider thematic funds like consumption (beneficiary of mass consumption recovery) and financial services themes given the decent risk-reward.
More conservative investors may consider hybrid funds, which tend to be relatively less volatile and can form part of their core portfolio.
Over the last two years, the equity asset class has given good returns, with the Nifty 50 up nearly 50 per cent and mid and small-cap indices almost doubled.
The valuations look stretched, particularly within the mid and small-cap space. Post this performance, whether equities will correct and, if it does, when and to what extent is anybody’s guess.
However, it may be prudent to look at hybrid funds, which tend to be relatively less volatile than pure equity products and may provide a better investment experience.
Further, with moderation in inflation, there are expectations of a reversal in the rate cycle, which may benefit the debt portion of these funds while providing stability to the overall portfolio.
Most importantly, one should not get swayed by the one-way-up move in equities but rather stick to the underlying asset allocation defined based on one's risk appetite and financial goals.
The majority of hybrid funds also include equity arbitrage positions, so the reported stock number looks high.
However, if one adjusts the arbitrage position and looks only at cash positions, that number is much lesser.
The higher stock count is due to marginal position in 20-30 names, but their contribution to AUM (assets under management) in total is in single digits. 90 per cent of our equity AUM is concentrated in the 45-50 names.
Hence, I would say that while it looks more diversified at a headline level, in reality, 90 per cent equity AUM in 45-50 names implies adequate diversification.
Our strategy for portfolio construction is a sort of barbell strategy. We like to invest in high-quality businesses at the one end of the spectrum, and on the other end, we also participate in “deep in value” businesses.
There is no restriction in terms of market cap allocation as well as sector, and we follow a bottom-up stock selection process.
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Disclaimer: The views and recommendations above are those of the expert, not Mint. We advise investors to consult certified experts before making any investment decisions.
