Widely read:
The Indian market continues to witness heightened volatility, driven largely by global geopolitical tensions, such as the announcement of Trump's tariffs. Owing to such turbulence, Saurabh Pant, Fund Manager at SBI Mutual Fund, believes it's difficult to say that the worst is behind us. He advises investors to brace for continued volatility and modest, single-digit earnings growth.
At the same time, Pant remains hopeful, stating that while these events may be rattling the market right now, they are unlikely to cause lasting damage to Indian equities. In his view, a combination of reasonable large-cap valuations, surplus liquidity and fiscal stimulus could pave the way for a recovery.
For those unaware of Pant, he oversees four funds, with a collective asset base of over Rs 1.07 lakh crore. Among them, the SBI Bluechip Fund and SBI Large & Midcap Fund have a four-star rating from Value Research.
Here's the edited transcript of our chat with him.
With the Sensex down 5 per cent and mid/small caps facing steeper declines in the last three months, do you think the worst is behind us, or should investors brace for more volatility in the near term?
It's very tough to say the worst is behind us. Our asset allocation framework gives an objective market view based on three pillars: earnings, sentiment and valuations. On the earnings side, we've had a robust growth of about 22 per cent for the Nifty over the four years before FY24. This year, that number has come down to low single digits year-to-date, which is a significant cool-off. We expect some pickup in earnings growth next financial year, but with recent negative events, those numbers could be pared down a bit. Still, we anticipate some recovery, though not back to the high growth rates of FY20-24. On the sentiment side, our index, which is a counter-indicator - when the sentiments are elated, we get cautious, and vice versa - things have cooled off significantly. From almost euphoric levels in the second half of last year, we're now at average levels, which is good news.
Regarding valuations, we look at the spread between the earnings and bond yield, currently at the 47th percentile, meaning 47 per cent of historical observations have been below this point. If you had invested at this valuation, you'd have generated about 13 per cent returns on the Nifty over the next 12 months, similar to long-term averages.
When you combine these three factors, valuations and sentiment have improved, but not so much on earnings. For Nifty, you can expect returns close to 13 per cent, but we're a lot more cautious on mid and small caps, where valuations are richer, so return expectations should be lower than historical levels. Additionally, investors should brace for potential volatility, particularly in the broader market.
Given the global economic uncertainty, how do you make investment decisions when things change rapidly?
It's very tough to make investment decisions in the current environment, especially with recent tariff announcements leading to a wide range of potential outcomes. Assigning probabilities to each scenario and reacting accordingly is highly challenging. A better approach is to evaluate the market from a risk-return perspective. As discussed earlier regarding expected returns, you should assess whether the potential returns justify the current uncertainties and risks. Given the seriousness of these risks, it might be a good time to invest if the returns seem acceptable.
However, in my view, the global risks at this point may outweigh the potential returns, suggesting that returns might not be sufficient to cover the current level of risk. Instead of reacting impulsively to these risks, focus on what reasonable returns can be expected from current valuations and prices, and base your decisions on that. This is a more effective strategy for navigating rapid changes.
What factors do you see as key drivers for a recovery in Indian equities over the next few years?
For Indian equities, particularly large caps, valuations are currently fair. The primary driver of returns will be corporate profit growth, which depends on revenue growth and margins. However, recent global developments, such as tariff announcements, have introduced significant concerns. If these tariffs persist, global growth could slow, requiring us to temper expectations for revenue growth. Lower global growth could also reduce capacity utilisation, putting margins at even greater risk. Between FY20 and FY24, a significant portion of corporate profit growth was driven by margin expansion, so we need to be cautious.
Despite these challenges, several factors could drive a recovery in Indian equities. First, the current tariff announcements may not be permanent. A change in stance through diplomatic or bilateral dialogues could lead to a more favourable tariff scenario for India. Second, India has implemented significant structural reforms over the past decade, which have yet to fully translate into growth. This creates potential for future upside.
Additionally, the government has consistently outperformed its fiscal deficit targets in recent years. Now could be an opportune time for a fiscal stimulus to boost domestic growth. The central bank has also improved liquidity, with more measures likely in the pipeline. These actions - potential tariff resolutions, structural reforms, fiscal stimulus and a supportive monetary policy - could improve India's growth outlook and support a recovery in equities despite the uncertain global environment.
Let's shift focus to your investment approach. You've been at SBI Mutual Fund for a long time. What does your investment philosophy look like? How do you go about selecting stocks?
The central idea of my investment approach is to deliver superior risk-adjusted returns. The philosophy revolves around two key aspects: controlling risk in the portfolio and finding opportunities for returns.
Controlling risk is a top priority. On the returns side, I focus on identifying opportunities where there's a dislocation between price and value - where the risk-reward is favourable or where the market is ascribing less value to a stock than its true worth at the current price. I'm also very cognisant about not overpaying for stocks. We are cautious about the valuations at which we buy, though we don't have a strict sell discipline; we typically only sell when valuations become ridiculous.
For stock selection, we consider several factors. First, we look for fundamental momentum - stocks where profit growth is expected to be significantly higher than the market, showing strong earnings momentum. Second, we target mean reversion opportunities, where margins, profitability or valuations are below their historical averages, and we expect them to revert to the mean. Third, we evaluate management changes, which in India can significantly alter a company's growth trajectory, for better or worse.
Fourth, we look at ownership and contrarian opportunities, such as under-owned or ignored sectors where a catalyst could unlock value. These factors guide our stock selection, balancing growth opportunities with disciplined risk management.
Mid-cap valuations continue to remain elevated. Are you finding opportunities where the growth potential justifies such high valuations?
The mid- and small-cap space has been challenging due to significant outperformance over the past four to five years, which has driven valuations to rich levels. Over the last 12 months, finding opportunities with attractive valuations in this space has been particularly tough. However, the market dynamics are now shifting rapidly. For instance, during the market declines in January and February, not all stocks corrected equally; some experienced sharper drops. Even in recent days, we've seen significant corrections in individual stocks.
Looking ahead, these market corrections are creating new opportunities. The mid- and small-cap space is becoming more interesting from a stock selection perspective, as the current environment is likely to generate more ideas with growth potential that better align with valuations.
Finally, looking ahead, what are some structural changes or trends in the Indian economy that you think will shape the equity markets over the next three to five years?
India has demonstrated significant fiscal prudence, which has been a strength. However, given the global economic challenges and emerging policy discussions in some countries, India could benefit from loosening its fiscal policy to provide a thrust to growth. This is a key factor I'm watching. For example, in the Consumer sector, which I have tracked over the years, growth rates have lagged behind GDP for an extended period. Policy interventions could act as a lever to stimulate this sector and broaden economic activity.
Additionally, India has gained a strong position in global equity markets over the past four to five years, attracting significant investor interest. Structural factors supporting this trend remain intact. Globally, many developed economies, such as OECD countries, face challenges like rising debt levels and ballooning interest costs, limiting their ability to stimulate growth. In contrast, India has more fiscal and policy room to manoeuvre, positioning it favourably on a relative basis.
Over the next three to five years, India's ability to unlock growth through targeted fiscal measures and capitalise on its relative economic stability could drive equity market performance, provided the quality of growth remains robust.
Also read: Earnings will make a comeback in the second half of 2025: Edelweiss's Bhavesh Jain
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
For grievances: [email protected]
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
