Axis MF’s Devalkar Sees Opportunities in Large Caps, Financials and IT

Axis Mutual Fund’s Shreyash Devalkar Highlights Opportunities in Large Caps and Financials

In a shifting market landscape, Axis MF’s Devalkar advocates for a balanced investment approach focusing on quality large caps and select mid and small caps.

Navigating Inflation and Interest Rate Concerns

Devalkar acknowledges the significant impact of inflation and interest rates on market dynamics but stresses the need to view these factors within the broader macroeconomic context. He argues that the real challenge for markets lies in the ability of corporate earnings to grow despite rising input costs and tighter financial conditions. He points out that while sustained increases in crude oil and commodity prices could exert pressure on India through inflation and fiscal balances, the market has already adjusted to many of these concerns. This adjustment has made valuations, particularly in large caps, more attractive for long-term investors.

In a scenario where inflation moderates and crude prices remain manageable, Devalkar believes that earnings growth can continue to support market stability. Conversely, a combination of high oil prices, aggressive rate hikes, and earnings downgrades could lead to increased volatility. His investment strategy focuses on businesses with strong balance sheets and pricing power, which can thrive across various macroeconomic outcomes.

Performance of Axis Large-Cap Fund

The Axis large-cap fund has faced challenges, underperforming compared to its peers over one, three, and five-year periods. Devalkar attributes this to the fund’s historical focus on quality businesses with strong governance and sustainable growth, which has limited its exposure to mid and small caps that have thrived in recent years. He acknowledges that even minor differences in stock selection and sector allocation can significantly impact relative returns in the large-cap space.

To address this, the fund has adapted its portfolio to align with changing market dynamics while maintaining its long-term investment philosophy. This includes increasing exposure to sectors like financials, healthcare, and automobiles, while reducing allocations to segments facing disruption. Devalkar emphasizes that a disciplined approach to stock selection and portfolio construction will be crucial for driving future performance.

Opportunities in the Financial Sector

Devalkar expresses a positive outlook on the financial sector, particularly high-quality private banks that have shown resilience through various credit cycles. He notes that these banks are emerging from a phase of balance sheet repair, boasting stronger capital positions and healthier asset quality. As economic activity picks up and credit demand increases, these well-managed banks are poised to compound earnings over the medium term.

In addition to banks, Devalkar sees potential in select non-bank financial companies with niche lending capabilities. He believes these firms will benefit from India’s structural growth, increasing financialization of savings, and expanding credit penetration.

The Outlook for Mid and Small Caps

While mid and small caps have enjoyed a significant rally, Devalkar cautions that future returns will increasingly hinge on earnings delivery rather than valuation expansion. He argues that the opportunity set is broader than a simple large-cap versus mid and small-cap debate. Large caps are entering a phase with more reasonable valuations and stronger balance sheets, making them attractive in the current environment.

He suggests that a balanced investment strategy that combines high-quality large caps with selective small and mid-cap opportunities will likely yield the best results moving forward.

Cautious Stance on IT Sector

Devalkar remains underweight in the IT sector, citing challenges posed by deflationary trends accelerated by AI. While valuations in the sector have become more attractive, he emphasizes the need for selective investment rather than a broad bullish stance. The near-term demand visibility for IT companies is closely tied to global growth and enterprise technology budgets, making stock selection critical.

He believes that if global demand stabilizes and technology spending improves, IT could present a contrarian opportunity, but the focus must remain on companies with strong client relationships and differentiated capabilities.

Key Highlights

• Devalkar emphasizes a balanced investment approach combining large caps with select mid and small caps.
• The Axis large-cap fund has underperformed due to a focus on quality businesses and limited exposure to mid and small caps.
• Positive outlook for high-quality private sector banks as they emerge from balance sheet repair.
• Mid and small caps may face challenges as future returns depend more on earnings delivery.
• Cautious stance on the IT sector, focusing on selective investments rather than broad exposure.

Investor Note: In the current market environment, investors should consider a balanced approach that emphasizes quality large caps while selectively exploring opportunities in mid and small caps. The focus on earnings delivery and disciplined stock selection will be crucial for navigating potential market volatility.