With equity markets roiled by the West Asia war and sharp swings in mid- and small-caps, investors are grappling with how to position portfolios.
In an interaction with Mint, Trideep Bhattacharya, president and chief investment officer-equities, Edelweiss Mutual Fund, with average assets under management of ₹1.65 trillion in the March quarter, shares why he remains cautiously optimistic and how investors should navigate the current phase. Edited excerpts:
Where do you see markets heading from here, given the recent volatility?
We are incrementally positive on markets, particularly from a near-term perspective. We entered this geopolitical phase—the US-Israel-Iran conflict—with fundamentals on a strong footing, macro conditions stable for India, and earnings growth or upgrades starting to come through on a bottom-up basis.
The war pushed up oil prices and had some impact on businesses. However, if the geopolitical impact is contained within April, the earnings impact would be minimal—roughly 2–4% (on Nifty 50 earnings). Compare that with the market correction, which has been in double digits.
Given that we are probably past the worst point of the geopolitical conflict, from a near-term perspective, I do think that markets will look forward to earnings recovery once we digest any transient fallout of the war.
The second factor is valuations. They are now hovering around one standard deviation lower than the five-year average—that makes mid- and small-cap valuations look attractive. If geopolitical risk gradually wanes, the conditions are right to be positive on markets.
We also did an analysis: over the last 50 years, whenever markets corrected due to geopolitical reasons, the three months following the worst point of impact have delivered fairly positive returns. The data, fundamentals, and valuations all point in the same direction.
How should investors deal with the volatility in mid- and small-cap segments?
First, investors should determine their allocation to mid- and small-cap segments in consultation with their advisors, ensuring it aligns with their overall asset-allocation framework. In addition, we believe that a staggered investment approach combined with a long-term investment horizon is among the most effective ways to navigate volatility and participate in the growth potential of mid- and small-cap equities.
Which sectors are you bullish on, and which are you avoiding?
We are positioning towards areas that are relatively insulated and show resilience. Three sectors stand out.
First, financial services, where credit growth appears to have bottomed out around late last year. We expect credit growth of 14-16% over the next six to nine months, which should have a positive spillover effect on the sector.
Second is power. Geopolitical conflict brings energy security to the forefront, and we see power as a more structural theme rather than a cyclical one.
Third is defence. Given increasing instances of geopolitical conflicts, we think defence would do structurally better going forward.
We have been staying away from utilities, telecom to some extent, and oil and gas, specifically upstream oil and gas, which is more on the receiving end given high crude prices.
What about the IT sector, which has been facing concerns due to AI-led disruption?
We see artificial intelligence as another technology cycle—one that is likely to create new engines of growth and progressively replace some traditional growth drivers, much like previous technology cycles have done. We view Indian IT services as a sector in transition, likely to take a few quarters to realign itself with these emerging areas of growth.
What should investors be doing right now?
Allocate incremental money to equities on a staggered basis over the next three to four months. We are relatively more positive on mid- and small-cap equities as well — valuations look attractive after the correction over the last few months. For someone with a five- to ten-year horizon, this is a good time to put money to work. Even after the recent recovery, valuations look attractive as things stand.
How should investors look at the specialized investment funds (SIFs)?
SIF as a category suits a more nuanced investor—someone with a slightly higher risk appetite. Given our positive outlook on mid- and small-caps, a product like an Equity Ex-100 Long-Short Fund or similar category makes sense in current circumstances.
The key advantage of the SIF structure over a typical PMS is that it operates on a mutual fund platform, which offers tax efficiency and higher transparency. For Equity Ex-Top 100 Long-Short Fund, which we are launching next month, the idea is a concentrated portfolio that can flexibly move between mid- and small-caps depending on the opportunity, rather than being confined to one end of the market cap spectrum.
Will the fund also take active short positions?
For practical purposes, it will be predominantly long-only. There is some provision for occasional shorting—perhaps 0% to 10% of the portfolio—but our orientation will be to capture alpha (outperformance vs the benchmark) through stock selection and business-cycle positioning, not through active short strategies.