West Asia tensions have persisted for nearly seven months now. How much of a risk is the continued uncertainty?
From a macro standpoint, there have not been too many instances when crude prices have stayed around $100 per barrel for a prolonged period. This is not conducive to a growth economy, as a cost push of this nature takes away some of our macro advantage.
The good part is that imported inflation has not yet meaningfully shown up in the economy, although it does exist to some extent. It is, however, showing up in corporate profitability.
Earnings are holding up, and inflation remains fairly controlled, so even if the West Asia tensions persist, we should be able to tackle them. However, given the geopolitical risks, investors should lower their return expectations.
Midcap and smallcap stocks have run up substantially in recent months. What’s driving the prices?
We had a somewhat surprising start to the year. Earnings were much better than expected, and that is one of the reasons why midcap and smallcap stocks have performed reasonably well.
These companies operate on a smaller base and have far more flexibility in managing costs. Some of the opportunities they are working on are also much larger relative to their existing businesses. Many of these opportunities are in manufacturing, defence, and electronics, and these categories have performed extremely well.
However, these stocks have now become somewhat more expensive.
How do you assess the opportunity set in the equity market now and as we move ahead?
From a valuation perspective, things are becoming fairly expensive in several areas.
Crude is around $100 per barrel and has remained elevated for a prolonged period. So, some of the expectations embedded in valuations will have to be normalised. That is why I think alpha opportunities in the market will narrow.
Where do you see opportunities currently? And why is information technology (IT) not an allocation at the moment?
We had an IT allocation at the beginning of the year, but it is not an allocation right now. Over time, it will come back when the opportunity becomes attractive, and the underlying drivers are right.
Today, we have a very large exposure to pharmaceuticals, largely in the generics space. Automotive and metals are the other major allocations. Between these three segments, we would be roughly 45 per cent of the focused fund portfolio.
You have previously spoken about investing in companies with significant revenues from outside India. Is that theme still relevant?
India is about 3 per cent of global gross domestic product. We aspire to reach 5 per cent and eventually 10 per cent. Given that we account for around 20 per cent of the world’s population, the next level of growth requires us to take market share from the rest of the world.
We are still a small part of the global trade ecosystem. The next level of growth for an economy like ours, therefore, has to come from creating dominant franchises across the globe.
The US did it, Japan did it, South Korea did it, and China is doing it. India has to learn to do the same. We have already done it in industries such as IT and pharmaceuticals.
Companies with an overseas presence remain a focus.
Do you expect the earnings growth momentum to sustain?
This year looks quite good. Next year, we will be working with a higher base, so there may be some moderation. But I don’t think we will have much of a problem with earnings growth.
 "Kenneth Andrade")