Mkt re-rating unlikely amid global uncertainty: Venugopal Manghat, HSBC MF

After a sharp run-up, valuations in parts of the SMID segment already factor in several years of strong growth, cautioned Venugopal Manghat, CIO at HSBC Mutual Fund.

Amid prevailing global macroeconomic uncertainty, Venugopal Manghat, CIO, HSBC Mutual Fund, told Saloni Goel in an email interview that a broad-based market rerating is difficult. Therefore, he said that investors should focus on businesses with high-quality earnings, strong cash-flow conversion, sustainable margins, and clear earnings visibility. Edited excerpts:

 

Is the current market ideal for stock pickers? 

The current market environment shows a clear divergence, with global markets volatile amid geopolitical and macroeconomic uncertainties, while India’s domestic fundamentals are increasingly supportive. Against this backdrop, we believe future market returns are likely to be driven more by corporate earnings growth rather than by a broad-based valuation rerating.  

 

This makes disciplined stock selection increasingly important. Investors need to distinguish between businesses with genuine earnings visibility and those benefitting primarily from momentum or abundant liquidity.  

We remain focused on companies with strong balance sheets, durable competitive advantages, capable management teams, and the potential to compound cash flows over the long term. As we have seen over the past couple of years, we expect stock selection to be a more important source of alpha than market direction in the near term. Check - TOP GAINERS NSE | TOP LOSERS NSE

 

Market consensus leans in favour of large private banks. Do you share that view & why/why not?

 

Large private banks offer healthy balance sheets, strong franchises, granular deposit base, technology capabilities, extensive distribution reach and relatively robust underwriting platforms. Their valuations appear reasonable relative to their own history, while their earnings remain closely linked to India’s credit growth cycle.

 

Recent regulatory measures have helped support a revival in credit growth across lending segments. At the same time, asset quality continues to improve, resulting in lower credit costs. We expect net interest margins to remain broadly stable, supported by transmission of policy rate changes, with lending rates typically repricing faster than deposit costs. The valuation gap between large private banks and public sector banks, as well as mid-tier private banks, has also narrowed. This makes the relative case for large private banks more nuanced than it was previously. 

 

We see opportunities particularly in well-capitalised institutions with strong liability franchises, sustainable credit growth and disciplined underwriting. Ultimately, the quality of earnings will be the key differentiator. Asset quality, capital efficiency, margin resilience and return on equity will remain important factors in assessing the right picks.

 

The rally in SMIDs has become the talk of the town; do you think it's turning into a crowded trade or has the rally just begun? 

India's small and mid-cap segment (SMID) has structural drivers such as strong capex growth, domestic consumption, formalization of the economy, and a deep pool of under-researched and under-owned businesses. We believe the strong performance of SMID over the past few years has been supported by fundamental improvement, including stronger earnings growth and rising return on equity across several companies. Over the past few years, SMID earnings growth has outpaced that of large caps, and the difference has been reflected in their relative market performance.

 

SMID segment is also very heterogeneous, with multiple sectors and sub-industries. So, viewing the entire SMID universe as one segment isn’t right. India’s structural growth opportunities span manufacturing, healthcare, financialization, consumer discretionary, and technology-linked sectors. The opportunity therefore remains, but the nature of returns is not likely to be the same. We may see greater dispersion between companies.

 

But after a sharp run-up, valuations in parts of the SMID segment already factor in several years of strong growth. Hence selectivity remains critical, with a focus on balance-sheet strength, reasonable governance, earnings visibility, healthy cash flows, and sustainable returns.

 

Where do you see opportunities for investors in the next one year? 

We see opportunities in domestic cyclicals linked to manufacturing/ industrialization, such as capital goods, power, defense, and select industrials. With higher capacity utilization levels, improving domestic demand outlook, strong deleveraged corporate balance sheets, and sufficient liquidity in the banking system, the private capex cycle is picking up gradually. The government has also taken various initiatives such as giving PLI incentives, lowering corporate tax rates, GST, and ease of doing business over the past years. These measures, coupled with tailwinds in terms of the China + 1 policy, favorable demographics, cost advantages in terms of labor, and signing of free trade agreements, mean we see domestic manufacturing doing well in 2027. 

 Financials remain a core allocation given the strong credit growth, healthy asset quality, stable NIMs, and improved liquidity conditions. From a savings perspective, people are shifting their investments from traditional assets such as real estate, debt, and gold to assets such as equity. Accordingly, some of the asset management companies, depositories, exchanges, wealth management companies, brokers, etc. will be key beneficiaries.  

Consumption stands to benefit from rising per capita income, higher disposable income, supportive policy measures and improving rural demand. Further, the young population is aspirational and prefers convenience, digitalization, and premiumization while shopping and spending on products. We are positive on consumer discretionary sectors as the penetration level is very low and there is a large unorganized/ regional/ unbranded market which is gradually shifting to the organized/ branded space.  

What are your expectations of the earnings front? Can it emerge as a key driver for market rerating? 

The latest consensus estimates point to healthy earnings momentum, with FY27 profit growth estimated at around 14 per cent for Nifty 100, 20 per cent for mid-caps and 34 per cent for small-caps. We expect the growth trajectory to remain supportive into FY28. The key drivers of this growth include continued government capital expenditure, resilient domestic demand, improving export growth, stronger corporate balance sheets and relatively stable margins. 

In our view, earnings growth, rather than further expansion in valuation multiples, should be the primary driver of equity returns over the near term. Given the prevailing global macroeconomic uncertainty, a broad-based market rerating appears less likely. Investors should therefore focus on businesses with high-quality earnings, strong cash-flow conversion, sustainable margins and clear earnings visibility.  

Equity SIP flows have been robust in the face of selling pressure. What does this say about Indian investors?

The resilience of equity SIP flows suggests that Indian investors are becoming more disciplined, reflects their growing maturity, and highlights a shift in how Indians save. Investors appear to be focusing less on short-term market timing and more on maintaining a regular investment habit through different market conditions. Investors increasingly view equities as a long-term wealth creation vehicle rather than a trading opportunity.  

SIPs instill discipline, remove the need to time the market, and turn volatility into an advantage. The steady flows from retail, especially from smaller cities, show rising financial awareness and trust in mutual funds.  

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.