India's top fund managers, handling nearly $120 billion in assets, are shifting focus to stable large-cap stocks following an election upset that has dampened enthusiasm for high-valuation stocks.
Managers at ICICI Prudential Asset Management and HDFC Asset Management are cautious about small-cap stocks and sectors such as industrials, defense, and state-run companies, which they view as overheated, according to a Bloomberg report. Nippon Life India Asset Management is shifting towards larger companies with attractive valuations.
This week has been volatile for Indian equities. An initial surge on Monday, driven by exit polls predicting a majority for Prime Minister Narendra Modi, was followed by a sharp downturn on Tuesday as his party lost its parliamentary majority, wiping out nearly $400 billion in market value.
While the market has since rebounded with Modi securing support from key allies, the focus is now on stocks that are fairly valued and less susceptible to sudden drops. Sailesh Raj Bhan, CIO for Equities at Nippon, which manages $29.4 billion in assets, highlighted the shift in investor sentiment. "There was a perception of zero risk earlier, which is now gone," he told Bloomberg. Bhan recommends focusing on good businesses at sensible prices and advises diversification to balance equity-heavy portfolios. Nippon is now leaning towards reasonably valued large and mega caps, with a preference for capex-linked investments and the emerging consumption theme, including private sector banks, consumer staples, foods, beverages, and quick-service restaurants.
Mahesh Patil, CIO at Aditya Birla Sun Life AMC, overseeing $18.8 billion, notes that some stocks in sectors like industrials and defense are ahead of their fundamentals and may face a "sanity check." Despite improved sector outlooks and higher valuations, Patil warns that stocks in these sectors might experience a "reset" due to overly optimistic future discounts.
Anish Tawakley, Co-CIO for Equities at ICICI Prudential, managing $61 billion, emphasizes caution regarding small and mid-sized firms, which have not provided an attractive risk-return trade-off. ICICI remains bullish on domestic cyclicals like automobiles, cement, and capital goods, and favors insurance and asset management companies over private banks. Tawakley expects local manufacturing to thrive on domestic demand, with urbanization and housing driving durable goods demand.
Roshi Jain, Senior Equity Fund Manager at HDFC AMC with $9.3 billion in assets, advocates for a diversified approach, focusing on company quality rather than single themes. "We need to look for companies that can take advantage of broad themes," Jain said. Due to higher-than-average market valuations, Jain maintains slightly elevated cash levels, limiting full cash deployment.