Expert view: Anish Tawakley, co-CIO Equity, ICICI Prudential AMC, is positive on the Indian economy. However, he believes softness in demand remains a challenge. He said that while an economic recovery will lift broad earnings, it will not rescue weak businesses that are overvalued. In an interview with Mint, Tawakley shared his views on a potential India-US trade deal, its impact on the market, and the sectors he is positive about, as well as the mid- and small-cap segments. Here are edited excerpts of the interview:
Do you see any structural challenges in the Indian economy?
There is no structural problem in the economy. In fact, the macro set-up is very sound.
If we consider all the macroeconomic parameters, including inflation, the current account deficit, and corporate and bank balance sheets, they are all in good shape.
The only challenge right now is that demand remains somewhat soft. That’s a cyclical issue, not a structural one, and it can be addressed through monetary and fiscal measures.
We have already seen some easing from the RBI and fiscal support through GST-related measures. If necessary, the RBI can take further action. Once demand revives, the economy will gather momentum, and markets will, in turn, follow suit, driven by earnings.
The only caveat is that while an economic recovery will lift broad earnings, it will not rescue weak businesses that are overvalued, particularly in parts of the small- and mid-cap space.
Those companies will continue to face pressure despite a better macro backdrop.
What will drive the market in the medium term? Can a delayed India–US trade deal eclipse optimism over earnings recovery?
Over the medium term, markets are always driven by earnings. Flows matter only in the short term.
Therefore, the key determinant will be how the economy and corporate earnings evolve over the next few quarters. We don’t believe that the India–US trade deal is central to the recovery story.
Even if the trade agreement takes time, the broader economic recovery can continue, as the sectors affected by tariffs account for a small part of India’s GDP.
The potential reduction in exports from a delayed trade deal can be analysed from two perspectives: the impact on aggregate demand and the impact on the current account deficit.
The impact on demand from lower exports can be compensated for by stimulating domestic demand.
The impact on the current account deficit is likely to be manageable, given that the current account deficit is currently at very low levels.
Even a one per cent reduction in exports can be absorbed through a mild adjustment in the exchange rate. In effect, while the trade deal may temporarily influence sentiment, it will not derail the underlying recovery trend.
What is your assessment of Q2 earnings trends? Can we say the worst is behind?
There has been some improvement in Q2 compared with Q1. Earnings reflect the underlying demand conditions. While the numbers have shown some improvement, it is still too early to call it a firm turnaround.
Which sectors are you betting on for the next one to two years?
Our base case is that, if required, a stimulus will be provided, and the economy will regain momentum. In that context, we are positive on domestic cyclicals, sectors such as industrials, capital goods, automobiles, cement, and financials.
These areas are most likely to benefit from a pickup in economic activity and capital formation.
Within financials, however, we remain watchful of unsecured consumer lending, where growth has been very rapid and risks are building up.
Where is smart money moving? Do sectors like banks and IT have value?
Retail money has been chasing small and midcap stocks, some with very weak business models and excessive valuations. This is clearly an area of concern.
Even though IT has turned cheaper, we expect the US economy to soften, which could put near-term pressure on IT spending.
So, our view is that despite the correction, the risk-return trade-off is not attractive. We expect banks to do better.
As the economy recovers and small and midcap valuations correct, promoters who have been relying on equity funding may return to bank financing.
That could support a meaningful pickup in credit growth over the coming quarters.
What has helped your business cycle fund outperform the market?
Our fund was positioned early for a strong earnings recovery post the pandemic.
We were of the view that FY20–24 would likely be a phase of robust profit growth and aligned the portfolio accordingly.
Equally important were the sectors we avoided. We had zero exposure to FMCG for the past four years and exited IT around its peak two years ago.
Over the last year, we have also maintained a very low allocation to small and midcaps, which has further helped us outperform as that segment saw some correction.
The discipline of staying true to our business cycle philosophy, i.e. buying into recovery and avoiding expensive defensives, has been key to our outperformance.
Considering the current market structure, does it make sense to shift focus to large-cap funds and stay cautious on mid- and small-cap ones?
Given the sharp run-up and stretched valuations in parts of the mid and small-cap space, it is necessary that investors be cautious and consider rebalancing towards large caps.
This is because large caps today are likely to offer better risk-adjusted returns in the current market setup.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.