Earnings growth, reversal in FPI flows crucial to mkt recovery: Bhandwaldar

Valuations are now more palatable compared to where they were 6-12 months ago, Shridatta Bhandwaldar, head of equities, Canara Robeco asset management company (AMC) said

The worst of the foreign portfolio investor (FPI) exodus is likely over with the dollar index peaking and new US policies starting to hurt the country’s market sentiment, according to Shridatta Bhandwaldar, head of equities, Canara Robeco asset management company (AMC). Bhandwaldar shared his perspective with Abhishek Kumar, in an email interaction. Edited excerpts:

 

Have valuations turned attractive after the sell-off? 

Valuations are now more palatable compared to where they were 6-12 months ago. Valuation is always assessed in the context of consensus earnings and growth expectations, both of which are crucial factors for the next 2-3 quarters. Based on consensus earnings expectations, largecap valuations are in line with the 10-year average of 18-19x one-year forward earnings. Midcaps are still trading at above 25x, around 10-15 per cent higher than the historical average (though earnings are more resilient here than smallcaps). Smallcaps are trading at >21x, a premium to historical valuations. For us, the worry in smallcaps is the meaningful disappointment in earnings. 

With the FPI outflows continuing, do you see the markets correcting further? 

FPI outflow has been an outcome of India’s higher valuations compared to its peers and the historical averages, earnings disappointment over the past three quarters and flight of capital to US after the election result. Appreciation in the US Dollar Index also soured investor sentiments towards emerging markets. We guess we have already seen the worst of the FPI outflows. With the dollar peaking and new US policies hurting its sentiment and growth, capital is likely to start flowing towards emerging markets. This will happen provided the earnings growth-valuation combination is attractive. We don’t expect FPI outflows to remain the primary driver for domestic market correction anymore. The focus will be back on domestic corporate earnings growth and revival trajectory. 

What can trigger a reversal in market direction? 

Visibility of double-digit corporate earnings growth and reversal of FPI flows can lead to change in market direction over the next 2-4 quarters. We expect corporate earnings growth to move back to double digits gradually, driven by revival in government capital and revenue expenditure, interest rate cuts and revival in domestic liquidity. 

How will March quarter earnings be? Do you see a revival? 

We don’t expect meaningful revival in March quarter earnings. But we expect the earnings downgrades to start moderating. Largecaps might end up reporting resilient earnings in the March quarter. Expect earnings to start gradually recovering from the first or second quarter of financial year 2026. 

Which sectors/themes are you bullish/bearish on? 

It is a far more bottom-up market compared to the past 2 years where themes were a primary narrative. We expect large banks, non-banking financial companies (NBFCs), pharma, telecom, aviation, hospitals, hotels, select industrials, automobile and consumer discretionary to deliver better earnings growth on a relative basis. 

Has the new market dynamics triggered a change in your fund management strategies? 

Change is the only constant in the market. Market context changes every five years. We have to make tactical adjustments to some of the prevailing factors but nothing beyond that. In fact, a bottom-up market is more conducive for our fund management style where business quality, management quality and balance sheet quality are core pillars of our thought process. Discerning markets like the current ones allow us to identify superior earnings growth and incremental capital efficiency companies and sectors better. From a portfolio sector allocations perspective, we have been adjusting towards more barbell (of domestic cyclicals and consumption) against emphasis towards domestic cyclicals over the past two years. 

Should investors consider raising equity allocations? 

We think that the expectations have been reset in terms of earnings expectations, valuations and most importantly return expectations from equities as an asset class. The market has corrected 15-20 per cent from the peak. Equity allocation can be raised with a longer-term view, based on an investor’s ability to take on volatility, existing asset allocation and base return expectations.