SMIDs to large-caps shift likely if earnings gap narrows: Bharti Axa CIO

The key issue is that high-growth mid/small-caps are stretched on valuation right now, while rest of the market appears relatively cheap, said Bharti AXA Life Insurance's CIO Rahul Bhuskute

Market rebalancing is bound to happen but Bharti AXA Life Insurance’s CIO Rahul Bhuskute expects the shift to take place when earnings growth gap between the mid/small-cap, and large-cap begins to shrink, he said in an email interview to Ananya Chaudhuri. Read the edited excerpt: 

What's your outlook for the markets for the remaining part of FY27? Are there more risks than opportunities?

 

If we look at the equity markets strictly from a bottom-up perspective, the emerging picture is reasonably positive. Expected Nifty earnings growth for FY27 stands at 17–18 per cent, supported by robust credit growth (19 per cent), strong Foreign Currency Non-Resident (FCNR) inflows, clean corporate balance sheets, healthy banking credit quality, and strong auto sales and GST collections. 

 

However, adding top-down macro factors such as crude oil prices, rising bond yields, geopolitical tensions, supply chain constraints, a strong El Niño, INR weakness, and the absence of domestic AI plays has clouded the outlook. That said, with the Nifty trading at a FY28E P/E of 16.1x (below its long-term average of 19x), we see more opportunities than risks. Nevertheless, we expect markets to remain range-bound until crude oil prices and bond yields stabilise. Check - TOP GAINERS NSE | TOP LOSERS NSE

Views on the mid-and small-cap segments? Are they relatively safer than their large-cap peers amid the FII sell-off?

While this is a widely held narrative, it tells only half the story. The outperformance of mid- and small-cap stocks has primarily been driven by superior earnings growth compared to the Nifty (with a 5-year Midcap EPS CAGR of 17 per cent versus 12 per cent for the Nifty). The ongoing FII sell-off which heavily targets broad index heavyweights has merely amplified this divergence. The core challenge now is that high-growth mid- and small-caps have turned expensive, whereas valuations across the rest of the market are historically attractive.

 

 A market rebalancing is inevitable, but we expect this shift to begin only when the earnings growth differential between mid and small-caps and large-caps starts to narrow. However, sizable outperformance will come to large caps only when FII flows become supportive. 

Expectations from Q2FY27 earnings season? Which sectors will likely outperform and underperform? Do you expect downgrades to pick up pace? 

We expect a solid showing from India Inc in the Q2FY27 earnings season, with aggregate profits projected to grow at a healthy double-digit pace despite headwinds from elevated raw material costs and weak global sentiment. Growth this quarter will likely be anchored by Financials, Energy, and Telecom. While consumer discretionary sectors like Auto have demonstrated resilient volume growth, we remain watchful of potential margin compression driven by rising input and commodity costs. 

 

The Street has already factored in a fair amount of earnings downgrades since the onset of the West Asia conflict; however, 'higher-for-longer' crude oil prices could trigger a second wave of incremental downgrades. 

 

How long do you see bond yield volatility persisting? How should investors approach banking and NBFC stocks? 

We expect bond yield volatility in India to persist through the remainder of FY27 before gradually stabilising later next fiscal year. This volatility is primarily driven by elevated global energy prices, firming international bond yields, and active monetary policy interventions.

 

Within the financial sector, we maintain a positive view on Banks. In a rising or elevated interest rate environment, banks can reprice their loan assets faster than their deposit bases, leading to swift Net Interest Margin (NIM) expansion. Conversely, NBFCs may face near-term margin pressure as their funding costs rise faster than they can pass them on to borrowers. 

What are your overweight and underweight sectors? How much average cash are you sitting on across your portfolios? 

We continue to be positive on sectors such as Financials, Telecom, Discretionary Consumer, Defence and certain pockets of Industrials. We also like to select new age companies which have delivered high growth through disruption and have started to deliver on profitability through scale and efficiency.

 

In general, we avoid taking cash calls for extended periods of time, and prefer to remain invested, across our portfolios. We are also selectively deploying excess cash in companies with compelling growth prospects and reasonable valuations, post the recent market correction. 

Globally, what's your view on the AI trade? Does it have more steam left, or is it already in bubble territory?

 

No one knows for certain, but what is clear is that the AI infrastructure buildout is real, with global AI capex expected to cross $1 trillion. Companies positioning themselves along this infrastructure value chain remain on solid footing, and we continue to view this segment favorably. What remains uncertain, however, is the extent to which tangible productivity gains are currently being realised by end-user enterprises. This adoption phase is still evolving. Over time, as enterprises, labor markets, and regulators adapt, the dynamics of this trade may shift significantly.

 

As a strategy, would it be wise to cut equity exposure and diversify more towards bonds, gold, and silver?

 

We have always maintained that asset allocation must be tailored to individual risk profiles and investment horizons. In this context, a well-diversified portfolio consistently delivers a superior risk-adjusted return profile. Equity markets have indeed experienced a correction in recent months, driven by escalating geopolitical uncertainties and macroeconomic friction. 

 

However, we have been positively surprised by the underlying resilience of the Indian economy and corporate earnings. While tactical shifts into gold, silver, or fixed income can help hedge near-term volatility, we maintain strong conviction in the structural, long-term growth potential of Indian equities

 

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