“I would lean more toward small-caps than mid-caps,” he said.
Nifty 50 earnings are expected to grow around 10% over the next couple of years, and small-caps could still see growth of 16-17%, Vora explained. He expects the broader market to continue to outperform the large-caps.
Edited excerpts:
Are you spotting any fresh trends in what investors are gravitating toward?
In the stock market, we are seeing a clear move towards the financial sector, especially the larger banks and NBFCs (non-banking financial companies), after a long period of underperformance. IT (information technology) services are seeing negativity due to lower growth expectations and uncertainty regarding the US economic growth and US President Donald Trump’s actions on trade and tariffs. Investors are also actively looking at gold in periods of higher inflation expectations. In mutual fund flows, we see that sector and thematic funds are seeing much lower flows after five months of volatility while the flows to flexi-cap and diversified funds continue.
How are you dealing with the market chaos? Have you changed your strategy considering the market downturn now?
This correction has reset the base for valuations and growth expectations. The slowdown in government spending in the quarters ending June and September 2024 has created a low base for this year. So, the growth numbers for the next few quarters should look favourable. We don’t take big asset allocation calls or hold cash in our equity funds. We believe that India’s domestic growth will continue faster than the rest of the world, including China. In the past couple of months, as the markets have corrected sharply, we have made some changes to the sector allocation. Given the easing stance of the Reserve Bank of India (RBI) and the government’s growth stance, we have increased exposure to lending financials, that is banks and finance companies and industrials sector. We reduced weight to IT, FMCG (fast-moving consumer goods), healthcare and some consumer discretionary names.
Also read | Bulls roar back: Nifty 50, Sensex post strongest weekly gain in 4 years
How does India look versus the US?
The US has been a star. Everyone’s been betting on it, but now the US is showing signs of slowing down, while India is expected to maintain its growth rate. So, India will now look better than the US. It has been five years of US outperformance, but that dynamic might be shifting now.
So, you see money flowing back from the US to India now?
There is a big factor at play beyond the central bank and the government—the dollar, which appreciated sharply last year—is giving up some of the gains in the past few weeks. But, despite global uncertainty, earnings growth in India is expected to be 10% for the large-cap universe and more for the broader market. The last nine months until December saw a cyclical downturn—partly self-inflicted due to tight policies, a slowdown in government orders and delay of payments to industries, which could have been avoided. However, they seem to have recognized this issue, and the government and the RBI are now clearly pro-growth.
I would lean more toward small-caps than mid-caps. The midcap index still seems pricey on a growth-adjusted basis, while the smallcap index offers better value when adjusted for growth.
We are seeing action—capital expenditure orders have been signed and rolled out over the last three to four weeks. The worst seems to be over, but with receivables ballooning, capital goods companies are still under pressure, with stocks down 60%. That said, markets always look ahead—stocks often stop falling before the recovery is obvious.
Is this the right time to start buying industrials?
Yes, I believe so. If our premise and belief is that India will grow at 6.5%, then it cannot be without investments in manufacturing and infrastructure. With stocks having corrected so much, the risk-return balance has turned favourable.
Which sectors are you finding value in in this market?
Most growth sectors have corrected significantly and offer good value. For the medium term, the sector that stands out is banking and finance companies. These segments had underperformed the market for almost two years for various reasons, but with the Reserve Bank of India turning dovish and the growth focus of the government, there is a good chance that financials will lead the market as relative valuations have really become attractive. Chemicals and auto-ancillaries have also become relatively cheap after underperformance as we believe these segments will also return to the growth path.
We have seen some recovery after the correction from peaks. Where do you see the market heading from here?
Valuations have corrected to more normal levels as there has been a five-month time correction and earnings growth. Nifty 50 earnings are expected to grow around 10% over the next couple of years, and small-caps could still see 16-17% growth. I expect that the broader market will continue to outperform the large caps, and we should see market returns that are in line with earnings growth.
Do you still see value in small and mid-caps? Is there still room for growth in large caps?
Large caps might deliver historical returns of around 11%, but the real alpha will still come from the broader market, including mid-caps and small-caps.
I would lean more toward small-caps than mid-caps. The midcap index still seems pricey on a growth-adjusted basis, while the smallcap index offers better value when adjusted for growth. In my view, the canvas of a small-cap space is very wide, and there are almost 800 stocks to choose from. So, at all points of time in the market, there are stock-picking opportunities, irrespective of market levels.
TRUST AMC (asset management company) launched a small-cap fund in October, but the broader market has been sliding since then. Do you have any more fund launches in the pipeline—perhaps something better suited for the current market?
Philosophically, we are growth investors, so we prefer stocks where there is potential for higher growth in the long term. Since we already had a flexi-cap for large-caps, the next choice was between mid- and small-caps—and the equation seemed more favourable for small-caps, given our growth approach.
Are there any sectors or themes that look interesting?
If you look at the structural makeup of the Nifty 50, about 35% is financials, and 15-17% is IT, where the growth guidance itself is in single digits. Then you have large oil marketing, petrochemical and energy companies growing in single digits. So, a large portion of the top 50 companies are either financials, which are tied to GDP (gross domestic product) growth, or global commodities with limited growth. That means the real action, incrementally, has to come from the broader market.
Also read | ‘I wouldn’t be surprised if we start seeing positive FII inflows in March’
We continue to be bullish on three themes—rising income levels, physical asset creation and technological disruption. Rising income levels mean that growth rates of segments catering to premium consumption will be higher. Some examples are premium vehicles, premium real estate, jewellery, consumer durables, hotels, airlines, etc. It also means that segments that cater to financial savings will grow faster—insurance, wealth management, asset management, broking, exchanges, depositories, registrars, distributors of financial services and products, etc. Physical asset creation includes sectors like real estate, capital goods, construction, infrastructure, power, defence and railways. Technological disruption includes all the new-age companies in the B2B (business-to-busines) and B2C (business-to-consumer) space, which use technology to create new business models or disrupt existing traditional models. So, these segments continue to remain our core picks. As discussed earlier, financials, chemicals and defence have corrected more and have underperformed. These also offer a good balance of growth and valuation.
How are the oil-related companies placed?
They’ve always been tactical plays for me, not long-term bets. Marketing margins have always swung between extremes—sometimes extremely high, sometimes very low—driven by greed and fear. They’re not structurally stable.
Many fund managers are now backing consumption plays. Do you think that’s a genuine opportunity?
Rural consumption is definitely making a comeback, and the K-shape recovery is holding up well. But structurally, I am not too bullish on low-ticket items like FMCG staples in highly penetrated categories like toothpaste, soaps, detergents and hair oil. That story seems to have largely played out. Unless there is an exceptional blockbuster product launch from a specific company, I do not see much growth left in staples as a sector.
So, where is the growth story in the consumption space?
The discretionary and premium segments are a different story altogether. The action is in categories like liquor, beverages, gems and jewellery, durables (ACs and fans), and services like hotels, travel, tourism, airlines, and watches.
Despite the sharp market correction that has significantly improved valuations, why are FIIs (foreign institutional investors) still selling?
I would say that from September to January, dollar strength was the main driver of FII flows globally. The US became a magnet and attracted money from all over the world. The DXY Index, which measures dollar strength, rose from 100 to 110 from September to December. January created a surprise with Chinese technology stocks coming into the limelight with the DeepSeek challenge to ChatGPT. This probably delayed money flowing back to India as many funds that were significantly underweight in China needed to buy Chinese stocks.
What are the triggers for FIIs to return to India? How is India placed in the whole emerging market basket?
Since February, we have seen a sharp correction, and DXY is back to 103. The rupee, which weakened to 87.5 in January, is now trading below 86, a good move. Government capex spending and ordering in sectors like defence are back, and the RBI has become dovish. The low base effect of last year should result in good growth for the next few quarters and if normal activity continues, then the India story continues.
Also read | Kumbh, cricket and concerts give Indian tourism a high. So why are the stocks down?
India’s position as the fastest-growing large economy in the world remains unchallenged. The long-term demographic story has not changed. We will grow faster than China, the US and most emerging markets. So structurally, nothing has changed, and India will continue to attract flows in the long term.
I think the worst is over, and FII funds will now flow back to India. In the past 25 years, there haven’t been two consecutive calendar years where foreign investors have been sellers. That said, I expect this year to end positive for FII flows.
All things considered, what do you think would be an ideal asset allocation and equity mix for a medium risk-appetite investor?
Asset allocation is a function of age, liabilities, personal aspirations, income level, etc. The younger you are, the more risk appetite you can have, and hence, more allocation to equities is advisable. With age, the allocation shifts to fixed income. Usually, equity allocation is for investment horizons over 3-5 years. Near-term liabilities should be parked in fixed-income assets. Within equities, a flexi cap fund can be a core holding. For investors with a higher risk appetite, small-cap funds offer a good opportunity for higher growth.
