If Q2 earnings are weak, markets will correct: Niket Shah

In a market that's breaking records almost weekly, few voices carry as much weight as Niket Shah's. A seasoned fund manager with nearly 15 years of experience, Shah is the chief investment officer (CIO) at Motilal Oswal Mutual Fund, where he oversees nine equity schemes worth around Rs 43,800 crore. His funds, particularly the Motilal Oswal Flexi Cap Fund, have staged an impressive comeback since 2023. The mid-cap and large & midcap funds have also emerged as stellar performers. In this interview, Shah discusses the factors behind his funds' turnaround and outlines potential scenarios for market corrections. He also shares insights on how substantial value is still to be found in the current frothy market. Below is the edited transcript. The Sensex has been hitting new highs almost weekly. Do you believe this rally can be sustained? What key factors do you think are driving the market, and what could keep it going? We consider two factors in the markets: fundamentals and flows or liquidity. In the last three years, markets have run up fast, but I think no one has taken the time to focus on earnings. Earnings growth for Nifty companies over the last four years has been about 22 per cent. The compound annual growth rate (CAGR) for mid-caps has been close to 36 per cent, and for small-cap companies, it's nearly 48 per cent. So when you have these kinds of growth rates, which we have never seen for mid-cap and small-cap companies since the index was formed, it's bound to happen that we will see a material amount of rerating in those stocks. If you look at the returns of those indexes, it's actually mirroring earnings plus or minus 2 per cent. Similarly, the largest change in the liquidity side has been attributed to the increased participation of retail investors. The number of demat accounts is increasing monthly, and mutual fund flows are quite strong. Domestic institutional investors and retail investors own 85 per cent of the market, while foreign institutional investors own the remaining 15 per cent. So when 85 per cent of the market keeps buying, and 15 per cent keeps selling, there is no impact on the ov