Expert view: Largecaps may offer better risk-reward; positive on private banks, telecom, says Rahul Baijal of HDFC AMC

Expert view: In the first half of FY25, the mid and small-cap segments outperformed large-caps. But this trend could reverse, says Rahul Baijal, Senior Fund Manager - Equities, HDFC AMC. In an interview with Mint, Baijal shares his views on market valuations, the impact of the US Fed rate cut, and the sectors in which he is positive. Edited excerpts:

How do you assess the market's performance this financial year? Should we expect the trend to continue for the rest of FY25?

In FY25, two significant events have taken place, locally and globally. Locally, the general elections and the announcement of the Union Budget 2024-2025 caused market volatility.

However, the confidence in political stability, policy continuity, and the measures announced in the Union Budget have since boosted market sentiment.

Globally – we have seen volatility in equity markets due to a shift in monetary policy by the Bank of Japan and the US Fed – which may continue to be a source of volatility in the rest of FY25, depending on the data points ahead.

Regarding market cap segment performance, all three segments posted positive returns, with the mid and small-cap segments outperforming the large-cap segment.

However, going forward, I think there is a possibility that this trend may reverse.

What is your view on the small and mid-cap segment's expensiveness in valuations? Do you think large caps offer superior risk-reward?

Over the last 18 months, many mid- and small-caps have delivered relatively better earnings growth and have re-rated, which is also reflected in the market performance of most of the companies in these segments.

However, some sectors/companies have seen their stock prices move ahead of their fundamentals, making them relatively expensive and, in my view, creating some froth in the broader markets.

On the contrary, many large caps have delivered reasonable earnings growth and have seen a phase of relative underperformance.

This has led to very high valuation premiums in the mid and small-cap segments compared to their own history and relative to large caps.

Thus, I believe large caps could offer better risk-reward in the medium term versus the smaller names.

The rate cut cycle has started in the US. How do you see it impacting the Indian market?

While domestic liquidity remains strong, FII inflows have increased in India since June 24, with the election and budget events behind us.

Most Fed Rate cut cycles in the past two decades have improved dollar inflows into emerging market equities, and I see no reason why this time would be any different.

Thus, India could be the beneficiary of this expected shift in flows, given (a) its relative growth attractiveness, (b) its track record of better dollar returns, and (c) its relatively lighter positioning in India vs the past for many FIIs.

Further, since FII exposure in India is predominantly in large-cap stocks (nearly 75-80 per cent of their outstanding exposure is in large-cap stocks), most of these incremental flows will likely be skewed towards the large caps. Thus, large-cap outperformance can pick up.

Do you see green shoots in the IT sector? Are concerns about a slowdown in the US economy overblown?

The verdict on the soft landing/hard landing outlook in the US over the next 12 months has not yet been reached.

So far, we are heading towards the soft-landing scenario, which is also visible in improved feedback on “green shoots” in the IT sector.

However, we must wait and monitor the data on the US economy over the next six months to gain more confidence in the direction of the wind.

Which sectors look attractive to you at this juncture?

At the broader level, we are positive on sectors with good earnings growth prospects and where the valuations are reasonable.

Some private banks seem well-positioned, given their strong balance sheets, healthy credit growth, good asset quality, and reasonable valuations.

I am also positive about companies likely to gain from the capex upcycle in India. Telecom and the healthcare space also look good from a medium to long-term perspective.

In healthcare, many businesses are doing well in the domestic formulations, US generics, and hospital space.

The power sector in India also offers some interesting opportunities, given the medium-term power deficit situation in the demand-supply equation.

How is HDFC Top 100 Fund positioned, and what is your investment strategy?

The fund follows an investing style that blends GARP (growth at a reasonable price) and value.

Portfolio construction is done from a medium to long-term perspective with a bottom-up approach to stock picking blended with top-down sector and macro trends.

When making bottom-up stock selections, special attention is paid to companies’ positioning and trends in the business, sector, and valuation cycles.

There is a focus on internal risk management guidelines, with active positions being controlled while ensuring compliance with regulatory and internal risk guidelines.

The fund endeavours to run an optimally diversified portfolio.

The Fund has generally been overweight in sectors with prospects of earnings visibility, recovery, reasonable valuations and underweight in expensive sectors.

Currently, the fund is overweight in financials, healthcare, and communication services and underweight in consumer and IT services.

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Disclaimer: The views and recommendations above are those of the individual expert, not Mint. We advise investors to consult certified experts before making any investment decisions.