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Ashish Gupta, CIO, Axis MF, remains optimistic on three themes for investment. The first theme is consumption, particularly in discretionary sectors like automobiles, real estate, and hospitality. Axis MF outlook on the financial sector, especially private sector banks, is positive due to reasonable valuations and limited new stock supply, despite increased availability in other sectors like private equity and IPOs. That is the second theme. The third theme is based on government initiatives such as Make in India, Production-Linked Incentives (PLI), and advancements in power, utilities, and defense shape our perspective.
It is a market where bulls cannot put a foot wrong. Is it only liquidity and liquidity and liquidity? Ashish Gupta: That is probably true. We have had liquidity primarily domestically, but with what is happening globally, both in terms of growth, as well as what is happening to global cost of capital, you are seeing liquidity move into asset classes across the board. So, it is not just India that is hitting new time highs, the US market is pretty much the same. China is also now at a 52-week high. Look at gold. I think multiple asset classes are feeling this flush of liquidity and that is what is reflecting in our markets as well now.
What is the best way to approach a market where you know that the technical aspect, which is liquidity is on your side, earnings are decent and globally there are no macro headwinds? What is the best way to maximise in this kind of an environment? Some call it Goldilocks, some call it easy, whatever may be the scenario, how do you benefit from it? Ashish Gupta: In this kind of environment, growth will continue to get a premium. Of course, one will have to be mindful of the extent of premium some of the companies and some of the stocks are trading at, but I believe growth will continue to command a premium both because cost of capital is lower and also on a relative basis growth is going to become more hard to come by. As several people have highlighted, India continues to stand out in terms of relative growth. In the US also the rate cuts are happening because there is some moderation in growth that is expected.
But even within India, we are entering a phase where there is going to be much more differentiation among companies and sectors in terms of the growth outcome. Over the last four years since COVID, we have seen a lot of cyclical sectors come back because they were in a down cycle and first quarter results, the June quarter results were actually a good indicator that growth is getting more differentiated across companies and I think that is what investors need to make sure that they are in stocks that have not just delivered growth last couple of years, but next two, three, four years growth outlook is stronger.
Would you outline some themes where valuations are okay in and around historical averages and for next two or three years growth could be reasonable, maybe mid-teens? Where are those pockets in this market? Ashish Gupta: Frankly, there are not too many pockets for very reasonable valuations and actually multiples are very anchored around growth expectations. We all talked about how large, mid and smallcap valuations are relative to each other, but we did another analysis where we looked at companies’ valuation in their growth cohorts and put companies where the earnings growth expectation is less than 10%, 10% to 20% and more than 20%. Companies with earnings growth expectations of less than 10% are on average trading at about 20 times earnings. Companies with earnings growth expectation of 10 to 20 today are trading at about 27 times earnings. And those with more than 20% growth expectation are today trading at an average of 34 times earnings. So, the growth is already getting a large premium.
Among the themes that we are still positive on, even in this construct, one is consumption and various aspects of consumption. It is related to discretionary consumption, includes automobiles, includes even things like real estate, hospitality.
We continue to like the financial sector, particularly the private sector banks. I think, one, the valuations are reasonable and another important aspect is that supply of new stock in this segment is going to be more modest. We have seen increasing supply in multiple sectors, whether it is from private equity or new IPOs, etc. But in this sector, even the supply of paper is going to be limited.
The third theme for us really is what is driven by government policies, whether it is towards Make in India, PLI, or on the power, utilities, defence side. So, those are the three big themes for us.
