On the broader end of the market, are you liking any particular sectors or stocks? Do you believe that now is the time for the largecaps to take the lead ahead for the markets or do you believe that there is some value on the broader end?
Harsha Upadhyaya: The broader end continues to be at a valuation level which is higher than historical levels and higher than largecaps for quite some time now. Although, we did see more volatility in that bucket maybe at the beginning of the calendar year, but post that, we have seen the broader end doing much better than largecaps. So, to that extent, from a pure valuation perspective, there is no sectoral pick in that end of the market.
We would be more stock specific and bottom-up in terms of our evaluation and wherever we can take slightly higher largecap positions in some of the funds that we have been doing. That is broadly in view of the relative valuations that are there between largecaps and non-largecaps. Otherwise, we are not negative on mid and smallcaps. So, if you are coming into mid and smallcap strategies, please come with a slightly longer-term horizon compared to largecaps and also be ready with slightly higher volatility given that they are trading at a higher valuation and that is what our view has been.
Let us look at the current setup where inflation is down, crude is down, dollar is down, and yields are also down. These are classic indicators that macro trade should do well. So, are we in for a macro outperformance which is banks, NBFCs, interest rate sensitives?
Harsha Upadhyaya: Looks like that and financials have been outperforming for the last couple of quarters, but not by a wide margin. We may not have seen very large absolute numbers from that portion of the market simply because markets have gone nowhere. But clearly, there has been an outperformance and we believe that segment will continue to do well and over a period of time, that outperformance will increase and become more visible given that we expect improvement in credit growth over the next 12 to 18 months.
I was going through your fact sheet and it is quite intriguing to know that the way to play defence according to you is via aerospace. What is it that you find interesting about this pocket and if you can identify some themes or companies within that?
Harsha Upadhyaya: We have been very positive on defence for quite some time now and we started building our positions when the government started to focus on indigenization and also larger investments continue to happen into defence. Given that the geopolitical issues are so significant and most of the economies, most of the regions are looking to spend more on defence, clearly we will continue to see higher level of investments going into defence not just in India, but also in other countries.
For Indian defence manufacturers, the opportunity is two-fold; one, they can continue to cater to Indian demand and also at some point of time, there will be export opportunities and that is something that we have been very keenly watching. While valuations are on the higher side, we are not increasing our position at this point of time but everything that is focused on aerospace, electronics, etc, and also explosives, which is going to be needed across the board whenever there is a geopolitical issue and a war, are the segments within defence where we have positions and continue to believe that over the medium to long term, this will continue to outperform; However, in the short term, the valuations are on the higher side and one needs to have a little bit of caution.
The earning season is just around the corner. We are right there. What are you expecting for earnings this time around? Do you believe that we could do better than last quarter because expectations this time around too are rather tempered?
Harsha Upadhyaya: It is unlikely to be anything very exciting, but maybe marginally better than the fourth quarter of last financial year is what we can expect. We believe that in the first two quarters of this financial year, we will be somewhere in the mid to high single digit in terms of earnings growth on Nifty basket and eventually in the second half, they should improve to slightly better numbers and move into double digits. Thereby the overall full year may see 10-11% year-on-year growth. If you are sequentially looking at it, maybe there will be slightly better numbers this quarter, but I do not think that is going to excite the markets in a big way.
In the light of no expectations from the earning season, a lot of paper supply, can we say that we should expect a downward bias now? In the next two quarters, there are no triggers, and everyone knows which way inflation is moving, which way tariffs are moving. If demand is coming back from FIIs, supply is coming from promoters. Are we in for a nothing sort of a market or a very low return patch now?
Harsha Upadhyaya: Frankly, the last six months have also been more of that nature and that could continue for another couple of quarters. Once there is a little bit of confidence on the earnings trend improving or credit growth improving, that is probably when you will see more legs for the market. Having said that, market volumes at this point of time have not been significant. So, to that extent, any of the liquidity events can drive markets one way or the other, and that is something one needs to keep in mind.
