The volatility is back in the market and this is no doubt a stock picker’s market. What are the pockets of value that you see amid this volatility and when the dust settles and the markets start moving up, what are the sectors that could lead from the front?
Nilesh Shetty: India started correcting in September of 2024 and the primary construct then was that there has been a significant disconnect between valuations and earnings growth and that has not materially changed. Even in the March quarter results, cumulative earnings growth for the BSE 500 was in low single digits. The rally after that, especially after the ceasefire where at least last month, the smallcap index rose 10%, has been very surprising and that again has created that disconnect between valuations and underlying earnings.
We remain very fairly cautious. There are pockets of opportunity and the largest pocket remains private sector banks. They trade substantially below their long-term valuations. The other big opportunity remains insurance as well as IT services. Now IT services is not a near-term story. It may be perhaps a two-year or a three-year story where you may have to wait for the discretionary spend in the US to pick up and the valuations remain comfortable. Our largest allocation in the value portfolio currently remains banking, IT services, consumer discretionary, and within financial services, we have a large allocation to insurance space.
Which side of the fence are you on when you talk about investment in particular sectors? Which sectors are you liking right now? Is it going to be an all-time favourite like banks where everyone has been betting on?
Nilesh Shetty: Yes, that is the obvious place where valuations look very comfortable, that is where our largest allocation is. But unlike the market, we also prefer IT services right now. We think there is significant opportunity if you are a patient investor there and we have been slightly ahead of the curve in the insurance space and we bought it when there was significant disconnect between valuations and where we think long-term fundamentals for the sector is.
We are slightly away from the market in certain sectors; we do not believe consumer staples still offer value. We have zero allocation there and we still do not believe capital goods offer value. The valuations in the capital goods sector is the same as consumer staples or even higher in most cases. Given the cyclicality of the sector, I do not think those valuations will sustain and investors may see a negative surprise there.
