'India's macro remains strong despite market correction'

With over two decades of equity research experience, Amit Ganatra has weathered multiple market cycles. "The worst seems to be over if you're toning down expectations," notes the Head of Equities at Invesco Mutual Fund, who looks after the entire range of equities and oversees six schemes with assets worth Rs 33,738 crore, including the four-star-rated Invesco India Flexi Cap Fund.

Since joining Invesco in 2009 (with a brief two-year stint at HDFC AMC), Ganatra has embraced the firm's disciplined investment approach, which includes a rigorous stock categorisation process and mandate-driven style selection.

In this conversation, Ganatra explains how Invesco's mid-cap fund made a strong comeback in 2024, provides context for recent market corrections, and shares his outlook on whether investors should expect more volatility ahead. Below is the edited transcript of our discussion.

Could you elaborate on your investment philosophy? What are the key principles you follow when selecting stocks?

I have worked for Invesco for so long that its philosophy and investment process has become my investment philosophy and process. From 2009 until 2025, I have been at Invesco—barring two years when I was at HDFC AMC—and we have been following the same investment style and philosophy. Invesco has two parts: investment philosophy and investment process.

Invesco's investment philosophy is that equity markets are not fully efficient. If you have strong in-house research and discipline in the process, you can generate alpha. Secondly, we don't have any style bias because we think the mandate decides the style. If you look at the asset mix at Invesco over the past few years, we have a decent amount of assets in growth-oriented strategies, but our biggest fund happens to be a contra fund, which is a value-oriented strategy. This outcome is only because we don't have any biases.

As far as the investment process is concerned in terms of stock selection, we have an internal stock categorisation process. In this process, we bucket companies into various categories. We have six categories, such as stars, leaders and warriors, among others, and we categorise them by growth, value and commodities. Therefore, the analyst team's categorisation limits our investment options to those companies.

At Invesco, we do not invest in any non-categorised company. The categorisation of stocks occurs when the analyst presents the idea to the team for discussion and debate. Afterwards, the categorisation process concludes only if we unanimously agree that a company qualifies for such a classification. From there, the fund manager's duty begins depending on what strategies they are managing. If the value fund is looking to invest in stocks, they have to choose companies from the value bucket only. So that's how the stock selection process works for us.

The Invesco India Mid Cap Fund made a strong comeback in 2024 after a challenging period from 2020 to 2023. What strategies or portfolio adjustments were key to this turnaround?

As a fund house, Invesco had a slightly challenging performance period from the second half of 2021 to December 2022.

During that period, a broad market rally occurred, which contrasted with the narrow market rally we witnessed between 2018 and 2020. In March 2020, our universe consisted of only 120 categorised stocks. The increased categorisation was insufficient to handle the broad rally in 2021 and 2022. There was a massive outperformance of poor-quality companies over better-quality companies. One thing that ties us together across all our funds is that most of our portfolios are high quality. So, high-quality portfolios suffered during that period. From the market recovery perspective, the value style started to outperform the growth style. Generally, quality and growth overlap, and most of our portfolios, including the mid-cap fund, were growth- and quality-biased, impacting performance. These factors led to performance challenges.

What did we do to make a comeback?

We strengthened our research team, expanded coverage, and focused on speeding up research. We are a process-oriented fund house, but sometimes, in the bull market, the process becomes handicapped because if you are slow to adopt the change, you miss the rally. So, we used to do a sector review 20 days after the end of every quarter. However, we have started doing it 10 days after the end of every quarter. While it requires more effort from the research and analyst teams, it speeds us up in investment decisions.

The speed of research and quality was never a challenge. An external factor also contributed to our improved performance. So, from the second half of 2024, when growth and quality started outperforming, our performance also gradually improved. While it began to improve from 2023 onward, it was not forcefully visible because the underlying style was still valuable. So, with some effort, the performance improvement started from 2023 onward, but it was reflected forcefully only in the second half of 2024. Along with these internal efforts, the external tailwinds also supported our performance.

Both the Mid Cap Fund and Large & Mid Cap Fund saw corrections in 2025. What factors led to this decline, and are you making adjustments to their portfolios?

If we look at the entire 2024, by December end, in some of the strategies, the average alpha we had generated was as high as 12-13 per cent versus the benchmark and some of the peers. Now, if your strategies do so well during the year, we also have to understand that there will be an overlap between the companies you own and the underlying momentum in the market. So, many companies we used to own also became momentum companies. This is because those companies were doing well, and there was a positive feedback momentum around them, and more and more investors wanted to buy them. By December, the valuations had become expensive.

There are two ways to approach this situation as a fund management team. One approach is to book profits wherever possible. So, in a strategy like Contra, we booked many profits in companies where this kind of rerating happened. However, when managing a growth-oriented strategy, the underlying assumption is that the company's earnings should compound faster over three to five years. And that was the primary objective of that investment; sometimes, you have to tolerate a period of overvaluation for a while. You can't leave an overvalued company because you won't find another good business. As a result, we would have booked some profit in some growth components of the portfolio, but we have not made massive changes. If you look at the Large & Mid Cap Fund and Mid Cap Fund, the growth component is higher. In Contra Fund, the growth component is lower, and the value component is higher. Since some of these growth-oriented companies gained momentum by the end of the year, we observed a sharp correction in some of them, which negatively impacted their performance. From our perspective, we are not worried as long as some of these companies are delivering strong earnings growth.

With the recent pullback in Indian equities, do you think the worst is behind us, or should investors prepare for more volatility?

If we want to understand where we stand today, we need to go back to 2020. In the past five years, the Nifty returns have been in the range of 17-18 per cent, and there are a few reasons for this outcome. In 2020, India's macro conditions began to improve, the banking sector's asset quality stabilised, and corporate India successfully completed its full deleverage. Therefore, the balance sheets of banks and corporates grew stronger.

India's fiscal deficit, a cause for concern during Covid-19, started looking okay relative to the rest of the world as other economies started giving large stimulus. Hence, we experienced a relative improvement. If your country's balance sheet has improved, you can confidently assert that macroeconomic conditions have also improved.

In addition, from January to March 2020, the equity markets experienced a significant correction, leading to entry multiples that became highly attractive. In the past five years, the earnings of Nifty grew by around 15 per cent compared to 3-4 per cent, so a lot of the returns that investors have been able to get in the past five years are a function of all these things playing out together.

We think India's macro remains very strong. In fact, our fiscal deficit, inflation and current account deficit are better than the 10-year average. Therefore, India's macroeconomic conditions remain as robust as they were at the beginning of the journey in March 2020, and the recent correction has not affected them. Nifty now trades at one standard deviation below the long-term average, and mid and small caps are trading in line with the long-term average. The only caveat is that while mid caps are trading in line with the long-term average, their long-term average is 27 times, which is expensive. Therefore, it's not a particularly cheap index in absolute terms, but from a historical average perspective, both mid and small caps are currently aligned with the long-term average.

The only thing that has changed is that in India, earnings are no longer growing at 15-18 per cent as we saw in the last few years; last quarter, they rose by 8 per cent. With some improvement in liquidity from the Reserve Bank and aggressive spending coming back from the government, these earnings might go to 11-12 per cent over the coming years. So now, if the expectation is that you can get 11-12 per cent of earnings over the next four to five years and not 16-17 per cent, then these are good market conditions to invest in, and the worst seems to be over.

However, if the expectation is that you should get the 20 per cent returns that you have experienced in the past five years, then you either need a time correction, or you need a further price correction. I would say that now, whether the worst is behind or not, it is down to the expectation that one has from markets, and in the last six or seven months, the most significant change we have seen in Indian markets is the reset of expectations. I think because investors got that 20 per cent return, they started expecting these returns for the next few years, and that made valuations expensive.

But with this kind of correction, valuations, to some extent, have retraced. In fact, on indices like Nifty, valuations have now become attractive, and if you are toning down your expectations for the next few years at 11-12 per cent earnings growth, the worst seems to be over.

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