Kotak Mahindra AMC's head of equity research, Shibani Kurian, advises investors to moderate their return expectations for Indian stocks due to current premium valuations. While the Indian market remains a compelling growth story, Kurian suggests that elevated valuations may cap future returns.
Kurian's investment philosophy prioritizes growth, quality, and reasonable valuations, which reflects a deep understanding of market dynamics. Kotak Mutual Fund's investment process has greatly influenced her approach to managing money. This approach involves purchasing high-growth, high-quality companies that trade at reasonable valuations, thereby achieving growth at a reasonable price (GARP) with a quality overlay. She emphasizes that the valuation multiple should not be the starting point of any evaluation, and that the first step in evaluating any company should be the business itself, focusing on scalable and sustainable businesses and companies gaining market share.
Harsha Upadhyaya, Chief Investment Officer of Equity at Kotak Mahindra AMC, offers an optimistic outlook, stating that even if there's no substantial recovery of earnings in the near term, the "risk of losing capital is low" as the market will continue to deliver modest returns over a 3-5 year period. He believes valuations are comfortable on the large-cap front as they are more or less around the long-term averages. Therefore, the risk of losing capital is low if you want to invest for three to five years. Typically, if you are a long-term investor, your returns should align with the growth in earnings. Hence, even if you don't anticipate a significant recovery in earnings in the near future, Upadhyaya remains confident that, given the ongoing growth story in India, you should expect reasonable returns from equities over three to five years. However, mid- and small-cap valuations are still high, so outcomes are harder to predict.
Upadhyaya suggests a stock-specific, bottom-up approach, favoring large-caps due to valuation. While positive on financials amid macro improvements, he highlights the long-term potential of the defense sector, particularly in aerospace and electronics.
Several factors could influence market movements in the near future. Earnings downgrades in the first two quarters of FY25 have led to consensus expectations of single-digit earnings growth for the year. However, expectations are for mid-teen earnings growth in FY26. The performance of both consumer demand and government capital expenditure (Capex) in the second half of the current financial year will significantly influence the direction of market movements in the near future.
Structurally, markets remain well-positioned, with India continuing to emerge as a significant player in the global equity markets. India's growth over a slightly longer timeframe remains one of the world's fastest-growing economies. The corporate sector's balance sheet health may be at its best since tracking equities. There has been a significant reduction in debt and deleveraging, and the return on equity (ROE) may be nearing its highest level ever recorded. It’s possible that more than 30 per cent of the stocks in any index report an ROE higher than 20 per cent.
Despite rising yields in developed markets, India's 10Y bond yield declined 15 bps since May. India's remarkable macro resilience, supported by falling inflationary trends, record RBI dividend and well controlled government borrowing program should help Indian bond yields to remain well anchored with further downward bias. The RBI is expected to maintain status quo in next two policy meetings, with a possibility another 25 to 50 bp rate cuts by Mar-26.
