Next two quarters will be tough for the markets, B. Gopkumar, Axis MF

We've also seen significant sector rotation over the past few weeks, making it difficult for fund managers to stay positioned across every segment, says B. Gopkumar, MD & CEO of Axis Mutual Fund.

Geopolitical tensions resurfacing in West Asia have made markets nervous once again. B. Gopkumar, managing director & chief executive officer, at Axis Mutual Fund, told Puneet Wadhwa in an in-person interview in New Delhi that generating meaningful alpha in this market environment will require careful stock selection and disciplined portfolio management rather than relying on a broad-based market rally. Edited excerpts:  Do you think the bears will have the upper hand over the next few months in the markets?  The market had begun to believe that geopolitical tensions, particularly in West Asia, were easing. Unfortunately, those concerns have resurfaced, bringing back uncertainty.  Domestically, India's macroeconomic fundamentals remain fairly well understood. Investors have largely accepted the current macro environment, so there aren't too many unknowns within India. What markets dislike is uncertainty, and at the moment the biggest unknown is how the situation in West Asia evolves.  The pace of global developments has been extraordinary. My assessment is that the next two quarters could be quite challenging for the markets from a global perspective. We've also seen significant sector rotation over the past few weeks, making it difficult for fund managers to stay positioned across every segment. That said, the domestic picture remains relatively stronger, and corporate earnings should improve compared to previous quarters.  A recovery in corporate earnings was expected from the June 2026 quarter (Q1-FY27) onwards. Given the renewed tensions in West Asia and concerns around a deficient monsoon, could that recovery get delayed? Are markets already pricing these risks in?  Some parts of the economy continue to perform well. Credit growth remains healthy, which explains why banking stocks have held up well and why many fund managers remain overweight on the sector.  As far as the monsoon is concerned, my view has changed somewhat over the past few weeks. Earlier, I considered it a significant concern. Today, even if rainfall ends up around 10 per cent below normal, I don't believe it will materially derail the economy. Markets appear to have largely factored that in.  ALSO READ | Wealth opportunities exist across market spectrum: Baldev Prakash, SBICAP  The bigger concern now is crude oil. Oil prices have risen again, and that complicates the rupee-dollar equation. Three weeks ago, conditions looked much more favourable—the rupee was appreciating, FCNR deposits were expected to strengthen liquidity, and banks had greater lending capacity. Now we need to closely watch how these developments affect corporate earnings.  Which sectors do you think could surprise positively this earnings season?  Banks continue to look reasonably strong based on the preliminary updates we've seen. The automobile sector also appears to be performing well. Beyond that, manufacturing remains an area of opportunity, particularly electronics manufacturing services (EMS) companies and capital equipment manufacturers. Corporate commentary from these segments has generally been encouraging, suggesting that investment activity is gradually picking up.  You interact with several corporates. What are their biggest pain points today?  Many companies had deferred large capital expenditure plans for some time. However, we're now beginning to see announcements around new greenfield projects, especially over the past few weeks.  Importantly, large corporates—particularly within the Nifty 50 and Nifty 100—have not revised their earnings guidance downward because of geopolitical tensions or the developments in West Asia. That's an encouraging sign.  That said, the next couple of weeks remain critical because a large number of companies will report earnings and provide management commentary. That guidance will determine whether current optimism is sustained.  Where do you expect disappointments this earnings season?  Information technology remains the weakest area. If you look at commentary from global technology companies such as Accenture and IBM, demand remains subdued. Indian IT companies are closely linked to global enterprise spending, so they're facing similar headwinds. We've already seen weaker commentary from some mid-cap IT companies, and I expect that trend to continue.  ALSO READ | Market re-rating will take time: 360 ONE Asset CIO Anup Maheshwari  On the positive side, automobiles, auto ancillaries, banks and NBFCs continue to look healthy. Even microfinance companies have reported that NPAs are at multi-year lows. Since these lenders operate at the bottom of the economic pyramid, improving asset quality there is a positive indicator for the broader economy.  Do you think there's disconnect between where the economy is today and the way markets are responding?  I wouldn't call it ‘disconnect’. It's more a case of markets being cautious than disbelieving the fundamentals. If you look at India's trajectory, FY23 marked the beginning of a major infrastructure cycle driven by government spending. Subsequently, policy measures such as GST (goods & service tax) rationalisation provided an additional boost to consumption.  While many people focus on direct tax cuts, I believe GST rationalisation has had a far more meaningful impact because it affects a much larger section of the economy. India pays far more in indirect taxes than direct taxes, so easing the GST burden helped revive consumption.  An economy performs best when both infrastructure investment and consumption move in tandem, and India was well positioned for a strong growth phase. Unfortunately, global uncertainties have become much bigger than anticipated. Those external developments have overshadowed an otherwise healthy domestic story.  So, are you saying markets are not fully convinced that India's macro fundamentals remain strong?  To some extent, yes. The fundamentals are actually quite encouraging. India continues to grow at around 6.5-7 per cent, inflation is under control, and food inflation—one of India's biggest concerns—is at very comfortable levels. Minimum Support Prices (MSPs) have also remained supportive.  If you look at the broader economy, most macro indicators are pointing in the right direction. The challenge is that global events have repeatedly interrupted what could have been a much stronger market cycle.  Mid- and small-cap stocks have significantly outperformed large caps over the past few months. Is this becoming a bubble?  From a valuation perspective, large-caps still offer comfort relative to mid- and small-caps. However, earnings growth in the mid- and small-cap space has been stronger, and investors are constantly looking for alpha.  ALSO READ | Valuation excesses in low-quality stocks pose biggest risk: Vinay Paharia  Over the past few years, large-cap portfolios haven't delivered meaningful excess returns, whereas investors have found better opportunities in mid- and small-cap stocks. We did see money returning to large-caps about four or five weeks ago, and those stocks started performing better. But renewed geopolitical tensions shifted flows back towards mid-caps.  I wouldn't describe the current rally as a euphoric bubble. The rally is largely earnings-driven. The real issue is that nothing is particularly cheap anymore. Investors are simply chasing companies that continue to deliver earnings growth.  Are your fund managers finding it difficult to buy in these markets as investment ideas are becoming scarce, or do they think they’ll be able to buy stocks lower in the next few weeks?  I don't think it's a lack of ideas. The bigger challenge is that portfolios have become extremely differentiated. If you compare large fund houses, you'll find considerable overlap in their large-cap holdings. But in the mid- and small-cap space, common holdings between fund managers are often limited to just 20-25 per cent. That tells you there is no clear market consensus on which stocks will emerge as winners.  Fund managers are increasingly relying on their own conviction rather than following the benchmark.  Another challenge is fund size. Large mutual funds managing ₹50,000 crore or more cannot meaningfully deploy capital into smaller companies without running into liquidity constraints. As a result, portfolios become more diversified, which can dilute returns.  Liquidity remains a significant issue, especially in small-cap stocks, making portfolio construction much more challenging.  What's the most crowded trade in Indian equities today?  Without doubt, it's mid- and small-cap stocks. That's where the bulk of active money is flowing because investors continue to believe these companies can deliver superior earnings growth and alpha compared with large-caps.  What will drive growth for the mutual fund industry going forward?  Systematic investment plan (SIP) inflows remain the biggest structural driver, and they've been remarkably consistent despite market volatility. Another major opportunity lies in expanding beyond the top cities. We are increasingly focusing on B30 locations because awareness levels there continue to improve. Regulatory incentives should also help deepen penetration in these markets.  At the same time, fintech platforms have transformed distribution. They now account for a significant share of new customer acquisition, giving the industry access to a much wider investor base than traditional distribution channels.  Do you expect retail participation to remain strong?  At this stage, I don't see any structural reason for retail investors to pull back. Markets are cyclical, but the investment ecosystem has become much stronger. The regulatory framework is robust, investor awareness has improved, and SIPs continue to encourage disciplined investing. As a result, I don't see fear becoming a dominant factor for retail investors.  When do you expect foreign institutional investor (FII) flows to return with animal spirits?  Several global factors are working against emerging markets at the moment. US bond yields remain attractive, global investors continue to have multiple investment opportunities elsewhere, and hedging costs are elevated. Until global uncertainty subsides and interest rates stabilise, FII flows into India are likely to remain volatile.  A few weeks ago, things looked considerably better. Banks were expected to benefit from stronger deposit mobilisation and improved lending activity. However, renewed geopolitical tensions have once again clouded the outlook.  My overall assessment remains unchanged: the next two quarters are likely to be difficult for markets. Generating meaningful alpha in this environment will require careful stock selection and disciplined portfolio management rather than relying on a broad-based market rally.