While macro uncertainties have eased and policy momentum has picked up, the missing link remains corporate earnings, which he expects to revive meaningfully only in the second half of FY26. Until then, Bhattacharya believes the market will hold steady, supported by improved consumption drivers and investor sentiment, but without major upside.
Edited excerpts from a chat:
How do you see the markets going ahead following the Q4 earnings season?
The markets are now close to September 2024 levels. Our earnings growth is likely to be back by the second half of FY26. And then there will be the festive season effect as well. For the next 3–4 months, earnings growth will take time to come back.With macro uncertainties out of the way, we expect time correction in markets from here till the festive season. When we say time correction, it’ll be in the range of 5%.
We’ve been saying since the beginning of this year that the markets have been climbing the wall of worry. In January, we didn’t know where India would spend, and we didn’t know what Trump would do in terms of policies. And 2024 was dominated by national elections, so earnings took a backseat. The only thing that is still missing is earnings.Policy paralysis, which was there in 2024, has now been resolved. And in the first quarter of the calendar year, economic decision-making has started. You can see that in the form of order announcements.For this to translate into earnings, it’ll take a few quarters more—which is where the second half of FY26 hypothesis lies. So basically, the market has moved from an extremely macro-uncertain environment to one with a reasonable macro. But we are standing without the support of earnings. Till then, we might see a bit of time correction.
So you don’t see the possibility of a major decline?
Not more than a 5% range. While the macro has been particularly torturous over the last 2–3 months, three or four positives have happened, which can’t be ignored. Oil prices have corrected 25%, which is a big boost to consumption. Second, inflation has come off by close to 100 basis points, which will also boost the consumer’s pocket.
Third, rate cuts have happened, and liquidity has been eased. And finally, in the Budget, the Finance Minister effectively gave a salary hike for urban consumers to the tune of 5–7%.
All of these make a reasonably strong case for consumption to start picking up in the second half of this year. We have a strong case for earnings coming back.
The only risk to this overall scenario is if Trump overdoes it. Then we will probably see a global recession starting with the United States, which will have global implications.
How comfortable are you with the valuations now?
Largecaps would be basically in line with, or at a 5% premium to, the 10-year average. Mid and smallcaps would be anywhere between a 17% to 25% premium to 10-year averages.
At the end of the day, we are bottom-up stock pickers and we are fine with largecap valuations. Within mid and smallcap, we advise selectivity as a strategy—in the sense that wherever there is a valuation premium, we make sure that there is an earnings growth premium that comes along with it.
Mid and smallcap stocks where growth is faltering but valuations are still high are in the penalty box. Those are the ones to avoid. And fortunately, we’ve been able to do so, which is why, if you look at the PEG ratios of our portfolios, it seems to suggest that we’ve kept a balance between valuations and growth at a steady level.
Which sectors are you particularly interested in at this stage?
At the beginning of the year, we called consumption the dark horse of 2025. We actually also launched a consumption fund in the first quarter of the year.
The second one is financials. Within them, we are bullish on NBFCs in particular, which are one of the rate cut beneficiaries and whose valuations are still reasonable. Earnings growth is likely to remain strong as we get into FY26.
The third area where we have been overweight is defence. The recent conflict between India and Pakistan opens up the opportunity for exports. That is something that will play out in the medium term. In the near term, valuations capture a whole bunch of positives.
And finally, with regard to IT services, this is an area where we have been underweight. But we are gradually going neutral because we think expectations are extremely reasonable right now. Valuations are around long-term averages.
If you look at it, things can get better from here. This is, of course, barring a scenario where we have a global recession.
The market doesn’t seem to be very bullish on staples, as the numbers haven’t been very good, but discretionary is relatively better. Would you agree?
This is the reason why we called out consumption to be the dark horse of 2025. We were positive on consumer discretionary, but not on staples. The reason staples have not done well is because they cater to mass consumption, which was hit by high inflation and interest rates.
Now inflation has started to come off, and we are seeing more rate cuts happening. This will act as a boost. A slightly better-than-expected monsoon will be positive for mass consumption.
Staples will gradually make a comeback. In the last 2–3 years, consumption has not done extremely well.
We have been saying that premiumization is a big theme, but that doesn’t seem to have played out as much. Why is that?
That hasn’t played out because real income growth has been lower in that segment over the last couple of years.
Urban income growth has been struggling for various reasons—jobs, inflation, etc. Our real income growth has been weak, and that’s why the Budget gave tax benefits. This would mean that effectively, the net take-home salary will increase somewhere between 5–7%, which is the annual salary hike for an urban consumer.
So it effectively gives them an additional salary hike, which will hopefully boost earnings of consumption companies as we go towards the second half of this year.
Some mutual funds have been sitting on huge amounts of cash. But as a fund house, Edelweiss doesn’t make cash calls. In that case, how do you deal with the problem of valuation?
The cash in our portfolios is usually less than 5%. But even within that, we’ve historically held lesser cash as we were not particularly negative on the market since the beginning of the year.
The overall way we manage valuation risk is by shifting our allocations across different market cap ranges. Between large, mid, and small, whichever segment offers us more valuation comfort—adjusted for growth—we are gradually moving towards that.
My two bits on cash calls is that we don’t want to mix asset allocation with stock selection. Your job is stock selection, not asset allocation. Asset allocation is about how much money I should put into equities versus how much cash I should hold. That is typically best done by a distributor who knows the client’s cashflow profile.
