‘SIP flows healthy but investors more watchful after pullback’

Yet, he says, there are expectations of improvement in GDP and corporate earnings in the second half of the current fiscal, driven by higher government spends and return of migrant labourers from Bihar after Chaath Puja—a festival marking the invocation of the Sun god that ended last month.

India's GDP growth fell to a seven-quarter-low of 5.4% in July-September, while earnings for the quarter were also tepid.

Against this backdrop, Heredia bets on a bottom-up approach of picking stocks with healthy cash flows, a sound management, potential for growth and attractive valuations, rather than following the theme-based or sectoral approach.

Edited excerpts from the interview:

Earnings and GDP growth in Q2 missed expectations. How do you think things look in H2FY25?

We are more optimistic about H2 in terms of earnings and GDP growth. Going ahead, we do expect some growth pick-up in H2 as H1 had impact from lower levels of labour availability and government spending. The year-on-year growth in H2 may be a challenge due to a higher base unless government spends pick up sharply.

Is there any early sign of anxiety from the SIP investor particularly, if we go into a time correction?

We are not seeing signs of anxiety from investors, including those who invest primarily via SIPs (systematic investment plans). That being said, we do sense a marginal change in sentiment and there is a degree of watchfulness creeping in. That will not change the trajectory of SIP flows but has the possibility of impacting lump-sum flows.

Read more: Colgate is making the right moves, though valuations offer little cheer

Are the heady valuations likely to be revisited in small- and mid-caps with our GDP growth target for FY25 being pruned?

A fair number of mid- and small-caps remain expensive on a relative basis, but we have seen that over a period, elevated valuations adjust with time or price corrections. Having said that, earnings growth from small and mid-caps have also been relatively better to date. More broadly speaking, we see markets in the near term to be in a consolidation phase and price movements will be dictated far more by individual company earning profiles relative to expectations, and we see limited scope for further rerating.

What is your approach to investing at this time?

Our approach to investing remains unchanged in terms of following our GCMV model (growth, cash flow, management and valuation) while making stock calls. We have always been cognizant of the concept that profit pool participation dynamically changes between and within sectors, and we are assessing that aspect much more closely as that ties in with our belief that earnings are key to future price movement over the next 12-15 months. Opportunities and challenges in that context exist in every sector or theme, and we would prefer to be bottom-up stockpickers in this market rather than trying to pick sector or theme winners.

Are you fully invested or holding some cash above the average you generally hold?

We have held the view that investors give their money to us to make it work for them in the market over the long term and take any cash calls they need to on their own given their asset allocation needs. Hence, we normally maintain cash levels in single digits though it may vary vis-a-vis fund types (market cap). The recent market correction has helped us buy/add to a few companies as valuations turned better.

Your view on IT and banking.

We believe that both sectors present a number of attractive opportunities from a prism of future earnings growth and/or valuation comfort. However, in line with what we said earlier, while we are positively inclined to both these sectors, we will be selective in our search for possible outperformers.

Read more: Does Siemens’ India growth outlook justify its rich valuation?

With the Sebi crackdown on derivatives to curb volumes, will there be some collateral impact on cash market volumes?

It is too early to judge and assess potential impact. Cash market volumes are a primary reflection of long-term retail and institutional flows in the marketplace, and currently we don’t see any major change in sentiment from a flow perspective. That being said, these matters are inter-linked, and it is an important aspect to keep in mind from a technical perspective over the next few months.

How would you split ₹100 if I want to invest at this point in time?

An easy answer to my mind would be 40:40:20 if you looked at an 18-24 months’ perspective, and a 60:20:20 from a longer time frame. Which is also why I believe multi-asset funds who have the flexibility to meaningfully invest in fixed income and gold are an ideal product in these times.

How will Trump impact global markets?

Again, it’s too early to call but will clearly have an impact over the coming quarters. The near-term reaction in markets to the US election outcome seems to be broadly done in our view. Going forward, we will have to react as it comes. We for one, would not wish to get into a guessing game on likely events and impacts, but rather remain mindful of the possible impact of future US policy measures as they evolve and react quickly to them as they happen.