Don’t panic and go extra heavy on largecaps; but follow multicap approach, says Edelweiss MF CEO Radhika Gupta

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Edited Excerpts:

Your suggestion to investors for 2024 was to lower their expectations. What are your views on markets for 2025?

The house view for 2025 is moderate expectations. Last year was a more star-studded election driven year. 2025 will be the year of moving away from the politics of elections to the reality of earnings. If you look at the Indian market, it's finally a slave to earnings growth. Earnings now really have to show up. When valuations are not cheap, all the more reason the market will look to earnings.

The first half of the year will be studded with potential volatility and events because you have US treasury yields at 4.5 percent, a new US president and potential trade wars. There's a lot to watch in the first half, and hopefully, it will make way where earnings pick up in the second half.

But do you think the deep correction is behind us?

The midcap index is more expensive than largecap and smallcap indices, however, midcap earnings, on the whole, have been better. It’s hard to tell how much they can correct in the short term, but after three years of an unabridged rally, a 15 percent fall can't be the end of a correction.

In aggregate, broadly, largecap, midcap, and smallcap segments have corrected equally. In fact, if you look at the earnings cycle, largecap and smallcap have seen more earnings disappointing than midcaps.

My advice to investors is not to be extreme. We're not telling investors to go sit in largecaps today. We're telling investors to follow the multicap approach.

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The other thing that will happen in the market is sectoral rotation. Last year, a lot of funds or other products were very much based on manufacturing, defence and infrastructure themes. That narrative will now shift to sectors such as technology and consumption.

We did a technology NFO (new fund offer) at the beginning of 2024 because we felt that in 2024 tech was a dark horse. We feel this year between rural recovery and the fact that consumption stocks have been down 20-30 percent, consumption could be the 2025 dark horse.

The consumption theme has surprisingly underperformed on a long-term basis. Why is that?

If you look at the previous decade, the market was driven by high-quality consumption companies. Further, over the last four-five years with the hope of private capex (capital expenditure) picking up, Make in India PLI (production-linked incentive), the manufacturing side of the economy and the market got a lot more attention.

Consumption stocks were also not cheap at that point. There was a meaningful rotation to the other side.

I think fundamentally, per capita GDP growth has a direct link to consumption spend and India is still a very consumption heavy country. So, if you look at when the US did $3,000 to $12,000 per capita growth, consumption spend also went up four times.

If you believe that's what going to happen in India, I think consumption will be the same. The difference, however, is the colour of consumption is changing.

I think when people see consumption funds, they tend to think of consumption as traditional FMCG. We don't look at it that way.

We think there is a category of traditional consumption, but there is also a category of emerging consumption. For instance, food delivery, or all the new discretionary category or beauty and personal care, and entertainment. You only have to see the enthusiasm for Coldplay concert tickets in Mumbai.

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There's also a category of consumption that is more cyclical, like hotels or autos. And we also think India's consumption basket as we evolve and as the economy grows will really change its colour. So, the highest consumption share in the US is a category called media and entertainment. It's 3 percent in the Indian market.

Consumption is going to become increasingly dynamic as a category. We figured that the combination of a structurally sound theme that has a lot of scope for active management combined with the fact that the theme hasn't performed like IT makes it a good bet. A lot of funds are getting launched in the category. We don't like to launch funds in very narrow categories.

What are you planning to do differently with the fund?

There are five to six catalysts that we're trying to capture in the fund. First is rising income levels, second is premiumisation, third is the shift from rural to urban, fourth is the whole element of demographics and the fact that your Gen-X and millennials spend very differently from previous generations. Fifth is the digital economy and particularly its linkage with e-commerce and last, the impact of credit and retail credit. These are the catalysts around which we are going to structure our fund.

Within consumption, there are companies today that are growing at 5 percent yearly profit growth, and there are companies growing at 30 percent profit growth. We're trying to do the stock picking in that basket.

What are your expectations from Budget from the mutual fund perspective?

I really hope the government rethinks debt taxation without making equity worse. I've been a big proponent of the stability of taxation, but I think debt is an important asset class, and the gap between 12.5 percent and the marginal tax rate is very high.

Any expectation on the economy side?

The market will be looking to see what the government does in terms of capex because right now, we haven't spent even the budgeted capex amount for this financial year.

The last Budget was jobs-focused. I think this time, they need to go a little bit more to help the middle class, which is hurting, and then try and push up consumption in the country.

Today we have three generations simultaneously investing in the market. This didn’t happen before. Do you think the way new innovative and narrow funds are coming up, that increases the risk for investors?

The mutual fund companies will provide a wide range of products to investors. I've been a big advocate for 'dal chawal investing' (plain vanilla funds) as a framework, and I think 'dal chawal' is healthy regardless of the age you're at. That said, three generations eat the same food, but then that new-gen may go out to a fancier restaurant.

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For instance, if I look at our index fund business, it's much more skewed towards new-gen. So it's a combination of educating people that they don't just need exotics and providing sensible differentiated products, and marketing them the right way.

What advice would you give to investors at this point?

Don't panic. Market fall is a feature of investing, not a bug, and it was going to happen. Talk to your advisor if you have one and don't have this urge to take action if you're confused.

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