Edited excerpts from a chat:
The mood in the market seems to be swinging in between the two extremes of greed and fear very quickly depending on the news flow coming in from the White House. How are you handling this period of abnormal volatility? Did you tweak your portfolios well before the meltdown began?We have not changed our investment style. We prefer to invest in clean, well-run businesses with strong balance sheets, returns on capital greater than cost of capital for long periods of time, and available at reasonable valuations. The rules-based investment approach in MeritorQ also makes it easier to stick to our regular investment objectives, without being swayed by short term volatility and news flow.What’s your current asset allocation mantra? Are you playing defence with value or offence with growth?Within equities, we are cautious on small and mid-caps allocation as index valuations in the space are still above historical averages, especially, after the recovery we have seen over the last one month or so. At the start of FY24, MeritorQ had significant allocation towards small and mid-caps, which worked in our favour. Over last year, however, this allocation has come down progressively. At this point in the market cycle, I think it would be prudent to be more defensive.
Within your portfolios, are you tweaking cash levels or doubling down on equities on every dip?As of now, we remain fully invested in MeritorQ. Taking cash calls requires one to time the market right twice, which is difficult.If you had to pick one sector for FY26, which one would you be backing and why?I think on fundamentals alone the broader financial services sector presents attractive opportunities in insurance, wealth management etc. where we are seeing the structural trend in financialization playing out. Our investing style remains sector agnostic though.One view on the Street is that all export-facing sectors, whether it is IT or pharma, will face trouble in the days ahead. Are consumer stocks the only defensive bet left in the market at this stage?Don’t think so. Lets remember that both IT services and pharma are not directly affected by the first round of tariffs announced by the Trump administration till now. In IT services, fear of slowdown in discretionary client spending due to the inflationary effect of the tariffs and impact on US growth, is already priced to some extent. IT index is down in double digits this year and among the worst performers over the last 3 years. If the US does not experience a tariff induced slowdown in the latter half of the year, I think there could be a case for recovery in IT stocks. In pharma, it is difficult to see how meaningful tariffs, particularly for lower priced generics, can sustain as those will drive higher outlays for US patients and potentially drug shortages. Also, if pharma tariffs are applicable for all countries, Indian pharma companies could have an edge given their cost advantage and regulatory track record and could very well be the last ones standing.
If the trade war gets limited, by and large, between the US and China, what kind of impact do you see on EM flows? Will India become more attractive for FIIs or will the entire EM basket suffer?If US inflation increases due to tariffs, then treasury yields could stay elevated, potentially dragging down EM flows. Markets hate uncertainty so in case of a full blown trade war, I think India could be a potential beneficiary especially if we are able to work out a bilateral trade deal with the US ahead of other major economies.
Which is that one data point which matters the most at this stage – bond yields, dollar index, Dow Jones or Q4 earnings?I think corporate earnings and outlook would be among the key drivers for equity markets as we enter FY26. However, investors should keep an eye on any structural trends from second and third order impact of tariffs and domestic consumption slowdown.
