Money flows to growth; India a growth, not value, market, says Axis MF CIO

Axis Mutual Fund CIO R Sivakumar says stronger earnings growth, especially in large caps, is critical for reviving foreign investor interest in Indian equities

Largecap earnings growth, not valuations, is the key determinant of foreign capital flows, says R Sivakumar, chief investment officer, Axis Mutual Fund (MF). In an interview with Abhishek Kumar and Samie Modak in Mumbai, Sivakumar says manufacturing, financials, and power-linked themes remain attractive, while the artificial intelligence (AI) boom could eventually benefit Indian information technology (IT) services firms despite near-term disruption. Edited excerpts:

 

Broader markets continue to outperform despite concerns over valuations. What explains the resilience in mid and smallcaps? 

Money flows where growth exists. India is fundamentally a growth market, not a value market. Largecap earnings growth has been in single digits for the past few quarters, whereas mid and smallcaps have delivered earnings growth of around 15 per cent. Therefore, investors are naturally gravitating towards areas where growth is visible.

 

The second factor is flows. Foreign investors have been persistent sellers, and they tend to disproportionately own largecap stocks. Domestic flows, meanwhile, are increasingly going into flexicap, multicap, midcap, and smallcap categories. Mid and smallcaps are therefore benefiting from both stronger earnings growth and stronger domestic flows.

 

Why have foreign investors continued to sell Indian equities? 

The answer comes down to earnings growth. Foreign investors are not selling because India lacks quality companies; they are selling because largecap earnings growth has slowed to single digits. Nominal gross domestic product (GDP) growth has slowed to around 8.5 per cent, and corporate earnings growth typically tracks nominal GDP. If nominal GDP is growing at 8-9 per cent, largecap profits will grow at similar rates. This is one of the key reasons foreign investors have been cautious.

 

What could bring foreign capital back into Indian markets? 

The short answer is ‘Growth’. If nominal GDP growth moves back to the range of 11-12 per cent, Nifty earnings growth can also move into double digits. The same foreign investors who are reluctant to buy at 8 per cent earnings growth will return if earnings growth rises to 11-12 per cent. India is not a market that attracts investors because it is cheap. Most global markets trade at lower valuations than even India’s value indices. Investors come to India for growth.

 

How do you assess the current macroeconomic environment? 

The economy slowed because of two deliberate policy actions. First, fiscal consolidation after the pandemic reduced the government spending impulse. Second, the Reserve Bank of India (RBI) undertook an aggressive rate-hiking cycle. Now, the cycle has reversed. Liquidity conditions are easier, rates have been cut, and credit growth is accelerating. Historically, monetary transmission takes one to two years. We should start seeing the benefits more clearly through 2026-27.

 

What indicators give you confidence that economic growth is improving? 

Credit growth is one of the indicators. Bank credit growth has accelerated from below 10 per cent to around 16 per cent. People borrow because they are undertaking economic activity. Currency in circulation has also risen sharply, suggesting stronger transaction activity. Bond yields have been rising despite RBI liquidity support, indicating that markets expect stronger growth and inflation going forward. Collectively, these indicators suggest economic momentum has been improving for at least the past two or three quarters.

 

Has the ongoing geopolitical conflict altered your investment outlook? 

It has affected supply chains and commodity markets, but company commentary suggests demand remains intact. If demand remains strong, any impact on revenue is largely a timing issue rather than a permanent loss. Markets are forward-looking. They will focus on whether demand survives, not whether a particular quarter’s earnings are temporarily affected.

 

Which sectors are you most constructive in? 

Manufacturing remains one of our preferred themes. Within that, we like areas linked to power, electrification, energy transition, and data-centre-related investments. We also prefer other categories, such as financials, particularly banking. Bank valuations have corrected meaningfully while credit growth remains healthy. The sector has become much more attractive relative to its own history.

 

Power, defence, and data centre plays have already rerated sharply. Is there still value? 

These themes are no longer cheap. Investors cannot simply buy anything associated with a theme and expect superior returns. The next phase will be much more selective. Markets will increasingly differentiate between companies that can actually deliver earnings growth and those that cannot. Thematic investing alone will not be enough.

 

What is your view on Indian IT amid AI disruption? 

We remain underweight for now because the industry is going through a transition period. Clients are demanding lower costs, and AI is creating pressure on the traditional billing model. However, I do not subscribe to the view that Indian IT business models will become obsolete. We saw a similar transition during the internet boom. Often, the biggest beneficiaries are not those who build the technology but those who successfully apply it. Indian IT companies can evolve from traditional service providers into AI-enabled service providers. The question is how quickly they adapt.

 

What’s your take on the AI boom? 

The companies building AI infrastructure are receiving enormous valuations today, much like internet infrastructure companies did during the late-1990s technology boom. But history shows that the biggest winners are often the users of technology rather than the builders. The companies that ultimately monetise AI at scale may not necessarily be today’s infrastructure leaders.

 

Do you see risks emerging from the AI-driven capital expenditure (capex) cycle? 

Yes. Large amounts of debt are being used to finance AI infrastructure and data centres. Capital equipment providers book revenues immediately, while buyers capitalise those expenditures and depreciate them over time. That accounting dynamic can create very strong reported earnings during a capex boom. Eventually, however, those investments must generate adequate returns. We are not at that stage yet, but investors should be mindful of the risk.

 

What is your outlook on fixed income? 

The core of investor portfolios should ideally remain in short-duration bonds. The risk/reward is relatively attractive, and yields remain compelling. For investors seeking duration exposure, the opportunity lies at the very long end of the curve rather than in the 10-year segment. The 30-year segment offers better value in our view.

 

Value investing has outperformed growth investing in recent years. Has that changed Axis MF’s approach? 

The common perception is that value outperformed growth. Our analysis suggests something different happened. Many companies traditionally classified as value stocks started delivering strong earnings growth after the pandemic. They outperformed because they became growth companies, not because investors suddenly preferred value.

 

The lesson for us was to broaden our research universe. We expanded stock coverage from around 200 companies to more than 450 companies. Growth remains our primary focus, but we now pay much greater attention to valuation and avoid overpaying for growth. We have introduced a much stronger valuation overlay. Growth remains essential, but if two companies offer similar growth prospects, we would rather own the cheaper one.