‘Valuations in mid and small caps reasonably expensive’: Axis MF equity head

The recent correction in Indian equity market following the global uncertainty due to the war in West Asia led to a drop in valuations across market caps. However, Shreyash Devalkar, head of equity, Axis Mutual Fund believes that while the correction led by sales foreign portfolio investors had corrected valuations for large-caps, it continues to be expensive for mid and small caps in certain pockets.

He also added that if Brent crude oil prices continue to about $100/barrel, it will have a major impact on the economy as already seen in depreciation of rupee, volatility in equity markets and elevated bond prices. In addition, higher commodity prices can lead to spike in inflation. The adverse impact will be felt mostly by companies or sectors which are operating with thin margins. Also, the fiscal deficit could rise if the prices continue to stay high.

$100 Crude Reality

After the war, he expects that both companies and governments will look at renewable energy sources more actively, leading to a rise in investment and towards achieving self-sufficiency in manufacturing. The sectors like power and defense which have shown growth till now are also expected to continue their growth.

Despite an 18-month period of volatility and almost flat returns, Devalkar asserts that investors to stay patient and focus on the long-term potential of equity with return expectations around the nominal GDP growth. “There has also been a consolidation/adjustment in the market due to high valuations and once it gets adjusted, investors can expect equity to perform well,” he added..

Besides equity, the commodities asset class has seen increased focus due to the rally in gold and silver in the last year. But he thinks that following the rally in recent months, gold may not continue to be a safe haven but rather become part of overall exposure in commodities.

The war will likely impact the earnings in FY27 as companies will take a hit. “Earnings growth expectations for FY27 were in mid-teens, before the war, which may be impacted now if war led supply side disruptions get extended,” he said.

Defensive Rotations

In the current uncertain times, sectors pharmaceuticals, telecom, infrastructure, real assets like utility and mining work well as defensive themes. If the crude prices cool down rapidly after the war, he expects themes like airlines, oil marketing companies, auto, lenders to also see a pull back.