We've favoured small caps since start of the year: CIO Invesco Mutual Fund

There are more broad-based gains in store for the markets in the years ahead, says TAHER BADSHAH, chief investment officer at Invesco Mutual Fund, in a telephonic conversation with Puneet Wadhwa. The elements required for India to experience a better economic cycle in the next five years relative to the past five years are in place, he observes. This should allow markets to compound closer to this historic rate, if not higher. Edited excerpts:

Is the Indian equity market now becoming more of a stock-specific story rather than one of across-the-board gains?
 

While the National Stock Exchange Nifty50 Index has delivered around a 14 per cent return since the beginning of 2023-24 (FY24), the annualised returns of the past two years since the turn of the global and local monetary cycles have been a more modest 11 per cent. This is lower than the five-year and 10-year compound annual growth rates of 13 per cent and 15.5 per cent, respectively. The elements required for India to have a better economic cycle in the coming five years relative to the past five years are in place. This should allow markets to compound closer to this historic rate, if not higher. More segments of the economy will gain traction in the year ahead, leading to more broad-based gains.

How have you at Invesco navigated these two phases — the 20-month consolidation phase and then the run-up since March 2023?
 

Towards late 2021 or early 2022, we began preparing for the possibility of markets favouring value over growth due to the likelihood of rising interest rates. We increased our already overweight stance towards industrials even further and became more cautious about consumption, with exceptions such as automotive and high-end consumer discretionary, where growth remained resilient. Since March 2023, the positioning has become more balanced as we anticipate interest rates to eventually decrease in 2024. Our preferences now also encompass consumption, in addition to those leveraged to the investment cycle, with equal focus on growth and value.

What are your sector preferences?
 

India is currently experiencing a robust investment cycle that could persist for an extended period, serving as the main driver of economic growth. As inflation stabilises and the possibility of a moderation in the interest-rate cycle gains ground over the next 12–15 months, consumption could also see a cyclical reversal. We hold a positive view on various segments of the industrial economy and find value in sectors such as technology, healthcare, and parts of the consumption basket. We maintain a neutral stance on banking and financial services.

Are the small- and mid-cap segments now crowded trades?
 

Small-caps have been our preferred space since the beginning of this year. While the segment has performed well over the past few months in terms of both flows and returns, it still holds the potential to deliver attractive returns over the next couple of years. Small- and mid-caps are typically more responsive to improvements in the domestic economic cycle, and despite recent outperformance, the overall asset class is not excessively overvalued.

How has the FY24 April-June quarter results season played out, according to you?
 

The overall growth trends for the broader market over the past two quarters have been somewhat better than expected, although not significant enough to meaningfully alter the earnings trajectory for FY24 compared to the forecast at the beginning of the year. However, it instils confidence in the prospects of an upward revision to the earnings cycle beginning in 2024-25 as some of the lagging parts of the economy start contributing.

With a busy election calendar stretching until May 2024, to what extent has a negative surprise been factored in?

Events, in general, are difficult to predict, and we typically do not adjust our portfolios for specific events. We maintain a fully invested approach at all times. For instance, even during the height of the pandemic crisis in early 2020, we held less than 5 per cent in cash. However, the current economic cycle is not significantly jeopardised by political outcomes.

Are you finding it difficult to attract funds through the mutual fund (MF) route as investors enter the markets directly?
 

While individual investing and pooled investing (MFs) have experienced their own micro-cycles recently, they are on a structurally secular trend as the investing and savings culture in India steadily deepens. Therefore, we see both coexisting based on their individual risk/reward profiles and investor preferences.

Could you highlight your biggest hits and misses as a fund manager in the past year?

Our strategy in 2022, which aimed to take a diversified and balanced approach across market segments and adequately represent important market themes in our portfolios, has proven to be highly rewarding. Our representation of small- and mid-cap stocks in various strategies, while improved compared to the past, could have been even better.