Time for lumpsum investment in multi-cap and flexi-cap funds: Union AMC’s Harshad Patwardhan

Edited excerpts from a chat:

How do you assess the current market construct as investors shift focus to FY27 earnings outlook?
After a long period of struggle since October 2024, we believe the equity market is now looking very interestingly poised. Expectation of improved earnings growth trajectory is a key element of improving prospects. In addition, the US India interim trade deal announcement in early February came in as a long-awaited trigger with a potential to improve FPI sentiment. Further, the current concerns about arms race in AI capex and its consequences help India in a relative sense as it is seen as a contra-AI play. All this makes us constructive on the market.What stood out for you in the Q3 earnings season? Are you more hopeful of broad-based growth than before?
On an aggregate basis, 3QFY26 results season show improvement in the breadth of growth across sectors, which is encouraging. Given the numerous steps taken by the government and RBI last year for inducing consumption growth, we expect broad based demand recovery to play out over the next year. In addition, the consummation of US India trade deal may likely lead to improvement in prospects of labour-intensive sectors which were earlier suffering from steep tariffs. On the investment side, we expect both public sector capex as well as private sector capex to drive growth. So, yes, we expect more broad-basing of growth going forward.

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Do you believe earnings growth expectations for FY27 are adequately priced in, or is the market still vulnerable to downgrades?
Expected earnings growth profile over the next couple of years is in line with long term growth trajectory and significantly better than what we have witnessed over the past couple years. As elaborated earlier, there are multiple growth drivers. However, there are always risks and uncertainties that may create challenges for growth. Geopolitics remains a key risk. If there is a flare-up of tensions in the Middle East, we may see oil prices rising leading to headwinds for earnings growth as well as sentiments. However, in a relative sense Indian markets’ prospects look more positive than they did last year.

Is the broader market trading at a premium justified by structural growth, or are pockets of froth beginning to emerge once again?
It is true that pockets of over-valuation were created from the second half of 2023 and 2024 driven by strong domestic flows into small/midcap categories. However, we believe that they have largely got corrected over the past 5 to 6 quarters. As noted earlier, overall tailwinds of growth remain solid and at this point in time valuations do not look alarming, so long as earnings delivery is strong.From a portfolio construction standpoint, are you currently tilted toward large caps for stability or selectively increasing exposure to mid- and small-caps?
At this point in time we believe that all the three segments: large cap, mid cap and small cap appear equally attractive in a broader sense. Therefore, we recommend a lumpsum exposure to fund categories such as multi-cap and flexi-cap. STPs and SIPs can continue in categories such as small cap, mid cap and innovation. Of course, individual investors should consult their financial advisors to decide their asset allocation based on their unique circumstances and needs.

Which sectors appear structurally well-positioned over the medium term, and why?
Structurally we are positive on financials given their improved growth prospects and reasonable valuations. We are also positive on capital goods/industrial sectors which can gain from multi-decade themes such as defence & power transmission and distribution. Consumer discretionary is another sector where we see strong medium term growth prospects given the policy markers emphasis on inducing consumption growth. Finally, we also see strong medium term growth prospects for the telecom sector driven by expectations of realization improvement.

Within financials, which pockets do you like more and why?
Within financials we like many segments at this stage. Given the prospects of credit growth improvement and stable policy rates, we like lenders, particularly banking businesses. We also like select businesses in life insurance and capital market plays.

How do you view the outlook for IT services amid global tech spending uncertainties and AI-led disruption?
Currently, there is a lot of noise in this space, and the situation is rapidly evolving. This makes the task of judging prospects of IT services companies very tough. At this stage, we believe the impact of uncertainties of global tech spending and AI-led disruption will likely be mixed, somewhere between the two extreme scenarios being painted. It is likely that the enterprise clients will need the support of IT services companies to implement large scale AI projects. At the same time the economics of traditional IT service companies will also undergo change in the new AI era.