Investor confidence in Indian equity markets has received a significant boost from stronger-than-expected corporate earnings for the June quarter, according to Harsha Upadhyaya, Chief Investment Officer and President – Equity at Kotak Mahindra Asset Management Company. In an exclusive interview, Upadhyaya highlighted that these positive results have allayed earlier concerns about a sharp demand slowdown and potential margin compression.
Beyond robust corporate performance, Upadhyaya pointed to several other factors contributing to the improved market sentiment. These include a notable easing of geopolitical tensions, particularly in West Asia, and a resurgence of foreign capital flows into the Indian economy. These combined elements have provided a meaningful lift to investor optimism and supported the recent recovery observed across equity segments.
Rupee Outlook Strengthens
A key area of concern for investors in recent months has been the stability of the Indian rupee, especially amid global uncertainties and sustained foreign institutional investor (FII) outflows. However, Upadhyaya indicated a significantly improved outlook for the domestic currency.
This positive shift is primarily attributed to strong inflows under the Foreign Currency Non-Resident (Bank) [FCNR(B)] deposit scheme. These inflows gained considerable momentum towards the end of July and are projected to remain healthy in the coming months, offering crucial support to stabilize the rupee against the US dollar. Furthermore, the return of foreign investors, who have begun buying equities again, adds another encouraging sign for the currency and broader market, although Upadhyaya cautions it is still early to confirm a sustained trend.
Kotak AMC Adjusts Portfolio Strategy
Reflecting the evolving market landscape, Kotak AMC has strategically adjusted its portfolio allocations. Over the past year, the fund has steadily increased its exposure to the private sector banks and financial services within its Flexicap portfolio.
A year ago, the fund was notably underweight in banking and financials. This gap has now been largely bridged, bringing the portfolio closer to a neutral allocation. This decision is underpinned by healthy credit growth, which has consistently expanded at approximately 17% year-on-year. Upadhyaya anticipates that improving system liquidity, partly due to FCNR(B) inflows, will help ease deposit-related pressures that previously challenged private banks.
Caution Maintained on IT Sector
Despite recent rallies in technology stocks, Kotak AMC, under Upadhyaya's guidance, maintains a cautious stance on the IT sector. While valuations have become more attractive following a correction, which may trigger intermittent rallies, the underlying business fundamentals have not yet shown sufficient improvement to warrant a more constructive position.
Upadhyaya noted that, with exceptions, business momentum across the IT sector remains subdued. Revenue growth continues to be muted, and profit margins are still under pressure, even with the depreciation of the rupee, which typically benefits export-oriented technology companies. Given the lack of clear earnings visibility, Kotak AMC continues to hold an underweight position on the IT sector relative to its benchmark, awaiting stronger evidence of sustained business growth before increasing its exposure.