Current valuations offer no safety net for negative surprises: Axis AMC CIO

Maintaining the current capex pace as a percentage of GDP would be a favourable outcome, said Ashish Gupta

Heading into the Budget, the government enjoys more flexibility than ever, buoyed by revenue growth and significant past capital expenditure (capex), according to ASHISH GUPTA, chief investment officer at Axis Asset Management Company (AMC). In an interview with Abhishek Kumar in Mumbai, Gupta emphasises the advantages of maintaining the current pace of capex. Edited excerpts:

Now that the elections are over, what do you make of the market?
 

Despite election uncertainty being a major point of discussion, it did not majorly impact market performance. The market continues its upward trajectory. One trend that may reverse is the continued selling by foreign institutional investors (FIIs) witnessed over recent months.

Emerging markets, including India, stand to benefit if the moderation in US yields persists. FIIs are currently estimated to be $100 billion underweight on India compared to key global indices.

India now holds roughly 19 per cent in the MSCI Emerging Markets Index and over 4 per cent in the MSCI World ex USA Index. Meanwhile, domestic flows have remained stable. Thus, the market is well-positioned from a liquidity perspective.

What are your expectations from the Budget? Are you positioning your portfolios accordingly?
 

We are currently in a wait-and-watch mode. One positive aspect is that this time around, the government has greater flexibility than in the past. There is strong revenue buoyancy, with the tax-to-gross domestic product (GDP) ratio having improved by nearly 150 basis points in recent years.

The Reserve Bank of India’s dividend alone amounted to over 2 per cent of GDP this year. Consequently, the government can increase spending without needing to deviate from the 4.5 per cent fiscal deficit target.

Substantial public capex has already been undertaken over the past four to five years. Even if the government maintains the current pace of capex (as a percentage of GDP), it will be a favourable outcome.

How do you view largecap, smallcap, and midcap relative valuations?
 

Valuations are quite demanding across sectors and market capitalisations.

The challenge lies in the fact that many fundamentally strong companies with clear growth prospects are trading at price-to-earnings (P/E) ratios exceeding 30x. Over 100 companies now boast P/E multiples breaching 50x.

The premiums of smallcaps and midcaps over largecaps have increased considerably. This is partly due to the presence of high-growth companies and sectors such as industrials, real estate, capital goods, and defence within the small and midcap segments.

In contrast, the largecap segment is primarily occupied by information technology services, a few conglomerates, and fast-moving consumer goods, which are not experiencing comparable earnings growth.

Do you expect elevated valuations to sustain? Do you foresee any emerging headwinds?
 

India’s macroeconomic fundamentals are robust, and economic growth appears resilient, which is why we are currently fully invested. As long as the government maintains its stance on macroeconomic stability, the economic underpinnings will remain strong.

There is a possibility of slight disappointment due to rising commodity prices, though it is not currently a major concern. However, surprises can arise. Hence, it would be prudent to maintain a margin of safety in terms of valuations, which is currently lacking.

You have been leading the investment team at Axis AMC for over a year now. What changes have you brought?
 

We have introduced differentiation in equity portfolios without compromising our growth-oriented strategy. This has been achieved in two ways. We now have 10 fund managers managing 23 equity and hybrid schemes. Previously, there were only four, leading to a high degree of commonality across schemes.

Simultaneously, our team of analysts has grown, broadening our coverage from 300 to 400 stocks. We have also taken steps to reduce concentration in our equity portfolios.

The top 10 stocks now represent roughly 10 per cent of total equity assets, down from 17–18 per cent previously. This broader diversification has led to lower volatility and improved scheme performance, with most schemes now ranking in the top two quartiles on the six-month performance chart.

Despite expectations of a turnaround at the start of 2024, growth as a style continues to lag behind value. Does this worry you?
 

Growth investing is already proving effective. It’s important to recognise that the drivers of growth have evolved as the economy has changed in recent years.

Unlike the period from 2015 to 2021, when growth was concentrated in specific sectors and companies, today’s growth is more widespread, spanning sectors from financials to automotive to power. Consequently, ownership, which was once limited to a few stocks in specific sectors, is now more widely distributed.