MUMBAI: Investors should not mistake rising energy prices and inflation risks for signs of an economic crisis, according to Taher Badshah, chief investment officer at Invesco Mutual Fund, who said corporate earnings have remained resilient despite growing concerns over commodity costs and geopolitical tensions.
“There could be some hiccups over the next couple of quarters, particularly as the full impact of higher energy and commodity prices flows through, possibly by September,” Badshah said.
He added that investors can still earn healthy double-digit returns with lower volatility than a pure equity strategy if fund managers are able to navigate and rotate effectively across asset classes.
Edited excerpts:
Foreign investors continue to sell, while domestic sentiment appears mixed. How do you assess the current market environment?
There are challenges, particularly around energy costs and inflation, but this is not a crisis situation or an economic collapse. In fact, earnings delivery has remained strong over the last two quarters, including the current season. There could be some hiccups over the next couple of quarters, particularly as the full impact of higher energy and commodity prices flows through, possibly by September.
That said, revenue growth has been quite reassuring. Measures taken over the last year on taxes, liquidity and rates are also beginning to seep through the system.
Globally, the outlook remains uncertain, but my sense is that the current conflict may not drag on for too long given strong compulsions on both sides. Even a partial resolution could ease pressure from energy and commodity costs, which would help India's inflation and corporate margins. Negotiations may take time, but could continue despite aggressive rhetoric.
I also believe some of the extremes seen in 2025 are now reversing. Foreign investors sold Indian equities heavily, but that trend could moderate and even turn positive over time. Inflation, which had collapsed last year, may rise somewhat, but moderate inflation is not necessarily bad as it supports pricing power and growth.
Overall, I think there is room for mean reversion, which could support markets again. In times like these, markets tend to overreact to multiple concerns, but with hindsight many of those fears usually prove exaggerated from a longer-term perspective.
Earnings have held up so far, but could come under pressure by September. Has the market priced that risk in?
That is probably not factored in. There is an expectation, but it is not factored in by the market because it is difficult to come to a clear understanding of the impact. Secondly, it is still a few months away, and meanwhile the situation could reverse or the data could surprise positively.
At that time, market reaction could be completely different, even if earnings stumble a bit. If by then the environment changes or prices correct sharply, the market may be willing to see it through rather than get worried about the first signs of cost pressure.
Where do you currently find comfort on valuations? Which pockets of the market are looking attractive to you?
There is comfort in some pockets today. At a very broad level, GDP growth itself is quite comforting from a valuation perspective. This is not a cheap market, and there has definitely been some valuation correction, but valuations are not in bubble territory either.
There may be some sectors where valuations look attractive, though it is difficult to call anything that is outright cheap at this stage. IT can be considered as cheap and banks are relatively inexpensive as even they have derated versus their own history.
Pockets of absolute cheapness are few and far between. It is more about relative cheapness, either relative to growth potential or relative to their own historical valuations. For example, if a stock is trading below one standard deviation from its historical average, compared to earlier when it traded nearly two times above that, then within its own lifecycle it looks cheaper.
But in terms of absolute cheapness, there are not many sectors trading at deep discounts. There could however be individual stocks that look attractive. Among the larger sectors, banks remain one of the few areas that stand out.
If you had to identify one segment of the market that you feel is mispriced today, which would that be?
IT is one space where I see some comfort, especially businesses with a certain secular growth profile rather than commodity-type businesses. IT companies are high free cash flow-generating businesses with fairly assured cash flows and consistent cash distribution through buybacks and dividends.
Apart from that, oil marketing companies also look relatively good from a valuation perspective at current levels, though they are more cyclical and commodity-linked. Some PSU shares also look attractive.
How should retail investors think about deploying money in a market that has already seen quite sharp moves?
You don’t really have a choice. I’m not talking about a five-year horizon, but maybe two to three years. At this stage, flexi-cap-type funds, because of their diversification, can give you some stability. Small-caps, in my view, will also remain a fairly vibrant space irrespective of the environment.
So flexi-cap products make sense for conservative investors or those looking to preserve capital while still taking some risk. Even small-cap strategies are a good option, but for investors with higher risk appetite especially through an SIP format or staggered investing approach.
Last but not least, for investors, multi-asset allocation is the way to go. These funds will become more important as the world moves into a phase where asset rotation could become more frequent. A structured fund with allocation across different asset classes—international equities, mid-caps, small-caps, gold, silver, commodities, maybe even China—provides diversification, which is very important.
If the fund manager can rotate well across asset classes, investors can still generate reasonable double-digit returns, potentially with lower volatility than pure equity investing.