Edelweiss Mutual Fund has reduced its overweight exposure to defence stocks but continues to like the space, Trideep Bhattacharya, President and CIO-Equities at Edelweiss MF, tells FE. He expects the September quarter to be better from earnings perspective compared to the June quarter. Excerpts:
How do you see the upcoming earnings season, given that June was slightly underwhelming?
In the June quarter, we saw earnings cut of about 1% for the first time after many quarters. But we are not overly concerned about this. We see this as a transition quarter because of two or three reasons. First, this was the quarter when elections happened, and effectively government activity and decision making practically stopped. Second, it was also the quarter when we had severe heat waves. So, economic activity was on the weaker side. The overall consumer sentiment was also weak.
But as we have moved forward, we have seen Rs 1.5 lakh crore of defence proposals being passed, power orders coming through and so on. The monsoon has been better than average. This augurs well for consumption. And as we get towards the festive season, the pre-festive checks seem to suggest that demand is fairly robust.
Do you see a sharp turnaround in the September quarter?
Probably not a huge turnaround. But it will show that we are gradually moving back to normalcy as we get towards the second half of the fiscal. This is also indicated by the companies in their June quarter commentary.
How do you think the Fed rate cut will influence FPI inflows?
It is certainly positive. Generally, whenever there are rate cuts, fund flows towards emerging markets increase. India would stand to be a beneficiary of this particular event, especially because compared to other emerging markets, our economic growth story is stronger. Even in MSCI EM index, India’s weightage has crossed that of China’s for the first time. It is symptomatic of that fact.
Moreover, I am a believer of flows following earnings growth rather than rates. Flows following interest rates are short term in nature, but when it is backed up by earnings growth, it tends to stick for a longer period. From that perspective, India is better placed.
What are your sectoral bets in the market currently?
We are overweight on manufacturing, power, NBFCs, real estate, IT services and defence. In defence, we have reduced our overweight, but we continue to like the space. We think these are the areas where earnings are likely to be more resilient. And one segment which we have recently added is consumption, particularly focused on the rural economy. These sectors make up around 70-80% of the flexicap fund that we run. Therefore, sector-wise or fund category-wise, flexicap for a conservative investor and mid-cap fund for an aggressive investor are good choices.
Do you see any reason for a sharp correction in the market given the valuations?
When earnings momentum is strong, corrections tend to be shallow. The policy continuity and broad economic momentum are intact. I think we are taking steps in the right direction.
Of course, if we have a 3-sigma event like what we saw in the case of the pandemic, or if there is any catastrophe, then things could be different. But otherwise, if there is any correction, it will be a generic one.
What does post-Covid retail flows mean for Indian market in the long run?
The pandemic was a boon in disguise for equity markets. Many people got a taste of equities for the first time and fortunately, over the last four years, the experience has been positive. When the starting experience is good, generally they tend to come back. I also think this is in a way structural. The proportion of equities in the individual investors’ portfolio will go up.
