Harsha Upadhyaya, Chief Investment Officer and President of Equity at Kotak Mahindra Asset Management Company, has indicated a significant improvement in market sentiment. This positive shift, according to Upadhyaya, is primarily attributed to easing geopolitical tensions in West Asia and a stronger-than-anticipated earnings season for the June quarter of 2026.
Upadhyaya highlighted that initial fears regarding a demand slowdown and margin pressures largely failed to materialize in corporate results. He noted that while the earnings season still had a couple of weeks left, the reported numbers were already exceeding market expectations, fostering optimism among investors.
Geopolitical Factors and Capital Inflows
Previously, stock investors were concerned about the West Asia conflict, which caused volatility in energy prices and put pressure on the Indian rupee. Persistent outflows from foreign institutional investors (FIIs) also weighed heavily on sentiment. However, Upadhyaya observed a change in this trend.
Strong FCNR(B) inflows, particularly towards the end of July, are expected to continue over the coming months, helping to stabilize the rupee against the dollar. Furthermore, FIIs have shown signs of turning positive, with some buying observed in recent weeks. While it's too early to confirm a medium-term trend reversal, this shift is seen as a positive development.
Increased Exposure to Private Banks
Upadhyaya revealed a strategic decision to increase exposure to private banks within his Flexicap fund and other financial instruments over the past year. He noted that a year prior, their portfolio was significantly underweight in banking and financial services, a position they have been gradually bridging to near-neutrality.
The comfort in private banks stems from sustained credit growth, which has been consistently around 17 percent year-on-year. While public sector banks and NBFCs benefited significantly from credit growth last year, private banks faced challenges in deposit mobilization and regulatory constraints. With FCNR(B) money now entering the country, Upadhyaya anticipates that deposit-side issues for private banks will diminish significantly over the next few quarters. He also noted that with no further interest rate cuts expected, the pressure on Net Interest Margins (NIMs) experienced during past rate reduction cycles should stabilize.
Outlook on the IT Sector
Regarding the IT sector, Upadhyaya cautioned that it is premature to declare a significant turnaround. Although valuations have become quite inexpensive, which could lead to sharp rallies periodically, the underlying business momentum remains muted for most companies, barring a few exceptions.
Despite a strong depreciation of the rupee, which typically acts as a tailwind for IT sector margins, these margins have remained under pressure. Consequently, Upadhyaya stated that Kotak AMC maintains an underweight position in the IT sector, as they do not foresee any dramatically different performance from the industry as a whole in the near term.