Mumbai: A slow-growth environment is the main trigger for the underperformance of Indian markets and foreign outflows, said R. Sivakumar, chief investment officer at Axis Asset Management Co. Ltd (Axis AMC), adding that a rainfall deficit is a legitimate risk but is unlikely to trigger runaway food inflation.
The primary threat of a poor monsoon is a decline in agricultural output, which impacts the macroeconomy by reducing rural incomes and dampening consumer spending power rather than generating a systemic inflationary spiral, he explained in an interview with Mint. Edited excerpts:
How has the leadership transition been, and should we expect any changes to Axis Mutual Fund’s investment philosophy or decision-making process?
The transition will see the investment philosophy remain substantially the same. Having been with Axis since 2009 and deeply involved in the investment process, the core focus continues to be on high-quality growth companies. This means targeting businesses that grow their earnings and cash flows faster than the broader economy’s nominal gross domestic product (GDP), while maintaining strong management, shareholder friendliness and efficient capital use.
However, there will be a slight adjustment in the day-to-day process. While historically the focus was heavily on growth and quality, there will now be a sharper emphasis on valuation to ensure the fund is paying the right price for that growth.
Now that major geopolitical events like the US-Iran peace deal are over, what factors will move the market?
To understand where the market is going, it is essential to look at where it has been. India has experienced a very difficult couple of years, with growth slowing significantly. Last year’s nominal GDP growth fell below 9%, landing in the 8% range, which represents a more than 20-year low for the country, outside of the covid-19 period. While an 8% nominal growth rate would be highly celebrated in places like the US or Europe, it marks a significant slowdown for India. This deceleration is particularly critical to monitor because, from the perspective of foreign global investors, India is not a cheap market.
Why have Indian markets faced recent underperformance and foreign capital outflows?
The primary trigger has been a slow-growth environment. Foreign investors look for high growth and are unwilling to pay a premium, like a 20x price-to-earnings ratio, when nominal earnings growth drops to around 8%. For market performance, nominal GDP is what matters because companies transact, generate sales and book profits in today’s rupees rather than inflation-adjusted terms. This slowdown was caused by two lagging policy factors: a sharp post-covid government deficit contraction from over 13% to 7.5% of GDP, which acted as an economic drag, and the central bank’s aggressive interest rate hikes. The brunt of this policy lag was felt recently, but the economic drag is now ending because the government has stopped reducing the deficit.
What is the economic and market outlook over the next two years?
The outlook is highly optimistic because the policy drag has stopped, and the central bank has shifted to rate cuts and easy liquidity. Driven by these leads and lags, nominal GDP growth is expected to accelerate from 9% to around 11% or 12%. This recovery will positively surprise global investors who are still anchored to last year’s low growth numbers. As large-cap companies begin growing at 11–12% in line with nominal GDP, their corrected valuations will naturally attract foreign buyers back to the market. Concurrently, mid- and small-cap companies, which managed to maintain a strong 15% growth rate even during the macroeconomic slowdown, will see a major tailwind to sustain or potentially exceed that pace.
Does the current rainfall deficit pose a serious threat to inflation or the broader rural economy?
A rainfall deficit is a legitimate risk, but it is unlikely to trigger runaway food inflation. Marginal increases in domestic minimum support prices keep food costs structurally anchored, and a well-supplied global agricultural market ensures India can easily import commodities to stabilize local supplies if needed. The primary threat of a poor monsoon is a decline in agricultural output, which impacts the macroeconomy by reducing rural incomes and dampening consumer spending power rather than generating a systemic inflationary spiral.
Where are the key sector opportunities?
Structural growth is overwhelmingly in manufacturing, as India commands a 5% global share in services exports but only a 1.6% share in manufacturing exports. Driven by currency advantages and newly signed free trade agreements that normalize tariffs, even a tiny increase in global market share will exponentially expand India’s small manufacturing base. Within this space, key opportunities include the automotive sector, which benefits from both domestic and export demand, as well as power and capital goods, which are driven by domestic growth and a major electric and renewable energy transition.
Defence is another strong pocket due to a multi-year structural shift, replacing imports with domestic spending. Conversely, major services sectors have faced headwinds; IT (information technology) has its own structural issues, and banks have been heavily sold off by foreign investors. While recent policy relaxations will help banks lower deposit costs, their broader outperformance will ultimately require a turnaround in overall interest rates.
Is sustainable growth or expensive valuation the bigger concern for investors?
The main concern depends heavily on the segment. Large-cap stocks do not present a valuation issue; their performance hinges entirely on the broader economic growth recovery. Conversely, mid- and small-cap segments face genuine valuation risks, as many trade far above historical averages, making growth sustainability crucial.
Disappointments in expensive stocks trigger a harsh double-whammy, compressing both earnings estimates and price-to-earnings multiples simultaneously. High valuations are justifiable if accompanied by substantial growth, such as power capital goods growing at 30% while trading at 50 times earnings, but paying the same premium for low-growth sectors like consumer staples offers no clear path to making a profit.
How does India’s current macroeconomic position compare internationally, particularly against China?
The global investment narrative is fundamentally reversing in India’s favour. Previously, foreign capital fled India for China because India paired high valuations with downside growth disappointments, while China paired low valuations with upside growth surprises. Today, China’s consumer indices continue to break new relative lows as its macro data deteriorates, while India’s macro indicators are consistently moving upward. With India now poised to deliver positive growth surprises on the upside, foreign institutional flows are structurally positioned to reverse and return to the Indian market.
What are the current macroeconomic upsides and downsides for India, particularly regarding manufacturing and policy risks?
On the positive side, geopolitical disruptions are accelerating India’s energy transition and shifting data centre demand to the country. More importantly, there is a major, underappreciated revival in manufacturing capital expenditure, which has been cyclically overlooked since its previous peak in 2010-11. On the downside, while the government and central bank are managing current dynamics maturely, a minor risk of policy errors reminiscent of the 2013 capital restrictions and aggressive rate hikes remains. Additionally, a broader structural risk stems from the global artificial intelligence market, which impacts global equity sentiment and leaves Indian IT vulnerable due to a lack of core AI (artificial intelligence) exposure.
Srushti Vaidya contributed to this interview.