News

One way or the other, an extended West Asia war will impact earnings growth, said Ajay Tyagi, senior executive vice president and head of Equity at UTI Asset Management Co.

He believes, “If markets remain flat or correct further, leading to poor two-three year returns, SIP (systematic investment plan) flows may slow down”.

Tyagi, who directly manages about ₹2.5 trillion worth of assets, explained that while the structural shift of household savings into markets remains strong, it will see ebbs and flows rather than move in a straight line.

He said that SIP inflows, currently around $3 billion, will have their own cycles and are unlikely to keep rising indefinitely.

Edited excerpts:

For large caps, the correction is mostly over, as they have reached a fair valuation zone. While not yet ‘cheap’, which would mean falling below long-term averages, they are close enough to offer comfort. Conversely, mid and small-caps still trade 30% to 40% above their long-term averages. This suggests more room for correction in the broader market. A portfolio manager’s job now is to look ‘under the hood’ for specific stocks or sectors hit harder than the general 10% market dip.

We have a limited understanding of where the war is going; even the US likely miscalculated the toughness of Iran’s retaliation. History shows these conflicts last longer than expected—the Russia-Ukraine war has lasted four years, and the Hamas conflict over two. To say geopolitics is already ‘baked in’ is incorrect. If the war continues, there will be consequences for energy prices and sourcing; we are already seeing trouble with LPG (liquefied petroleum gas) supply. We cannot say today's prices represent the ‘worst-case scenario’.

Market participants often wrongly extrapolate recent trends into the future. While FII exposure has dropped from 23% in 2021 to about 17% today, a decade low, we shouldn't assume it will keep falling. FIIs reduced their exposure to India because it was expensive compared to cheap markets like China and because the US bull run dwarfed returns elsewhere.

However, if Indian markets become more attractive through corrections or solid earnings, FIIs will likely return. Structurally, India remains a solid market with GDP (gross domestic product) and earnings growth among the highest globally for large economies. Conversely, we shouldn't extrapolate the recent surge in DII (domestic institutional investor) flows. High equity returns pull in liquidity, not the other way around.

If markets remain flat or correct further, leading to poor 2-3-year returns, SIP flows may slow. While the structural shift toward household savings entering the market is strong, it will still experience ebbs and flows rather than moving in a straight line. SIP numbers, currently at $3 billion, will have their own cycles rather than increasing indefinitely.

Over the last couple of years, defence has become an investor favourite. Fundamentally, the industry enjoys government support to reduce imports, boost manufacturing, and provide employment. While we agree with the bullish sentiment on the sector's importance, financial markets remind us that ‘trees don't grow to the skies’. In this case, two limiting factors exist: high valuations and customer concentration. Since the government accounts for 85-90% of sales, any stretch in government finances could elongate working capital cycles, hurting profitability and return on capital.

We also hold a cautious view on the broader PSU (public sector undertaking) rally. While some PSUs are excellently run, private-sector companies often manage businesses more efficiently over the long term. Therefore, investors should evaluate PSUs against their private counterparts on a case-by-case basis before pulling the trigger.

We are extremely positive on consumer tech platforms. These companies use technology to improve convenience and price discovery for existing products.

The second structural opportunity is manufacturing, backed by a significant government policy push. While defence offers a sustainable long runway, we disagree with current valuations, which already bake in massive growth. Conversely, electronics and mobile phone manufacturing (e.g., Apple and Samsung) provide strong growth potential for both domestic consumption and future exports.

Generating alpha is never easy, but a long-term perspective significantly increases your ability to do so. The short-term (6-12 months) is an extremely crowded trade because that is where everyone is focused. However, if you shift to a 3- to 5-year horizon, it becomes an uncrowded part of the market. During times of panic, such as a war, investors become even more short-term oriented; this behaviour creates excellent opportunities to take meaningful, long-term bets.

Yes, large caps currently offer better risk-adjusted opportunities. While, as a category, they are near long-term averages, certain specific large-cap stocks and sectors have been disproportionately hit over the last few months, making those specific opportunities even more attractive.

Most certainly. If this stretches for months, it will hit earnings. For instance, restaurants are already feeling the heat as the government prioritizes household LPG over commercial supply. Similarly, tile manufacturers in Morbi, Gujarat, are suffering from a shortage of gas. Beyond supply disruptions, rising energy prices drive inflation, which drags down end consumption. One way or the other, an extended conflict will impact earnings growth.

We focus on sustainable, structural winners rather than tactical ones. During covid, many companies rushed to produce sanitizers, only to exit six months later because it wasn't a profitable, long-term business. We don't want to back companies that only ‘make merry’ during temporary disruptions, like an LPG shortage. Instead, we prioritize business opportunities that remain sustainable over a three-to-five-year horizon.

Insurance companies may be affected, but it depends on their specific underwriting and net exposure. Most insurers reinsure their risks so that disproportionate liabilities don't hit their own balance sheets. We must examine specific companies to see if they hold underwritten risks that aren't fully reinsured.

Private credit is a significant concern in the US, but not in India, where the market remains very small. Overall, the leverage (debt-to-equity) of the Indian corporate sector is currently extremely low. Usually, a ‘blow-up’ or the pricking of a bubble does not occur when leverage in the system is this low. Therefore, I would rule that risk out for now.

Catch all the Business News , Market News , Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.

Download the Mint app and read premium stories