Defence, PSU stocks' rally leave little room for error: Master Portfolio MD

Defence, defence manufacturing, public sector undertaking (PSU) and railway stocks have become crowded trades after their sharp rally, leaving valuations with little room for error, according to Gurmeet Singh Chawla, Managing Director of Master Portfolio Services. In an email interview given to Heena Ojha, Chawla noted that even minor earnings disappointments could trigger significant selling in these segments, despite their underlying growth prospects.

 

Edited excerpts from the interview. 

 

With the recent bearish trend in the market, is there further room for valuations to correct?

 

Yes, though the room differs by segment. Large caps have already shed part of their premium and now trade only slightly above long-term averages, which looks fair rather than cheap. Mid and small caps are the bigger worry. Many still carry prices that assume earnings will grow much faster than they currently are, and when growth disappoints, such stocks usually fall harder than the index.

 

 

Foreign selling and a weak rupee add pressure, and domestic SIP flows cannot absorb everything indefinitely. While the current situation is not comparable to a crash, it does not present an opportunity for a bargain purchase. The outcome is that the multiples decrease automatically if the price continues to fall without a change in the companies’ earnings. Hence, it would be reasonable to select quality businesses and take a staggered approach to investing instead of attempting to catch the bottom.

 

What are your expectations from the Q2-FY27 earnings season? Are India Inc's earnings at a risk of downgrades as the geopolitical tensions continue? 

 

A mixed season looks likely. Banks and financials may show modest growth, with margins still under some pressure. Consumer companies are likely to see mixed demand, and higher input costs, especially for crude and commodities, could squeeze margins in a number of sectors. 

 

IT may stay muted because of cautious global spending. Geopolitical tensions push up energy prices and shipping costs and make currency swings worse. Management commentary will matter more than the quarterly numbers themselves. If companies sound cautious about the second half, sharp reactions could follow. If the tone is steady, a relief bounce is possible.

 

What are your views on the RBI policy outcome, and what could it mean for equities, gold & silver, bond yields and rupee?

 

The RBI raised its benchmark interest rate by 25 bps to 5.50 per cent and shifted its stance to 'calibrated tightening', a clear signal to bring inflation under control. What stands out is that the RBI also upgraded India's GDP growth forecast by 40 bps to 7.1 per cent. 

 

It displays growth is not falling apart. For equity investors, this matters more than the rate hike itself. Sectors sensitive to borrowing costs like real estate, NBFCs, etc will feel some pressure in the near term. But infrastructure, capital goods are well-placed, backed by the government's continued spending push and a healthy growth outlook. The broader equity story remains about earnings, and that story is still intact.

 

Bond yields will move higher in the immediate reaction, but the yield movement was already anticipated and priced in through September. However, the yields may rise somewhat from here and are also influenced by global bond yields. For fixed income investors, any sharp spike in yields should be treated as an opportunity to lock in better rates and not a reason to exit.

 

Gold and silver are tricky to assess at this point. In a rising interest rate environment, as returns on safer instruments like bonds improve, the appeal of assets like gold that earn no interest tends to reduce. So, some near-term softness is a fair expectation; however, precious metals serves a meaningful purpose as a hedge within a portfolio. 

 

If you had to identify one key risk and one major opportunity for Indian equities over the next six months, what would they be? 

 

The biggest risk is a prolonged geopolitical shock that keeps oil elevated. India imports most of its crude, so higher prices hit inflation, the current account, the rupee and corporate margins all at once. That chain reaction is hard to hedge.

The major opportunity is domestic. 

 

Government capex, a strong banking system and rising household investment give India a base that many emerging markets lack. If global conditions calm down, foreign money could return quickly, since few large markets offer comparable growth. Infrastructure, capital goods and well-run private banks look best placed to benefit.

 

As for a crowded trade, defence and related manufacturing stocks stand out, along with parts of the PSU and railway space. They had a spectacular run, and many now carry valuations with little margin for error. The underlying story is genuine, but when everyone owns the same story, even small disappointments can trigger heavy selling.

 

PMS faces competition from mutual funds, AIFs and direct investing. What is the strongest proposition for PMS today?

 

The strongest case is customisation and accountability. A mutual fund has to serve millions of investors with one portfolio. A PMS manager builds a concentrated portfolio of perhaps 15 to 25 stocks, held directly in the client's own demat account. Every holding, trade, and fee is visible, and that transparency builds trust that pooled vehicles struggle to match.

 

PMS also gives managers freedom to act on high-conviction ideas. Diversification limits and the liquidity constraints of very large fund sizes do not apply in the same way. A good manager can hold a smaller midcap that a giant mutual fund simply cannot buy in meaningful size.

 

The proposition works only with strong performance after fees. Concentration cuts both ways, and many PMS products have lagged simple index funds. Managers deserve to be judged on long-term, risk-adjusted returns, not on one good year.

 

SEBI has lowered the entry threshold to ₹25 lakh for PMSes. What operational challenges emerge for PMS managers

 

Moving from a few hundred HNI clients to several thousand creates real friction. The first problem is servicing at scale. Each client has an individual account, so every trade must be allocated fairly across all of them. Doing this accurately, without favouring anyone, demands strong systems and tight compliance.

 

Onboarding grows heavier too. KYC, risk profiling, suitability checks and documentation multiply, and smaller investors often need more hand-holding, more query resolution and clearer reporting. A team built for sophisticated HNIs may struggle to manage expectations among newer, less experienced clients.

 

Liquidity is another issue. With more money coming in, the temptation is to deploy it into the same limited set of stocks, which can hurt returns, especially in smaller names. Performance can also differ across clients depending on when they joined.

Finally, technology, reporting and regulatory audits all add cost. Back-office capacity, grievance handling and communication will need investment. Firms that scale thoughtfully will do well, while those chasing assets will likely see quality slip. Disclaimer: Views and outlook in this report belong to the brokerages and analysts cited. They do not reflect the views of Business Standard. Readers are advised to exercise discretion.