Investors need to lower their return expectations: Amit Ganatra of Invesco Mutual Fund

How do you read the current market scenario? Is this recovery likely to continue on the wave of expected interest rate cuts?

Market conditions should be assessed on the basis of macroeconomic outlook and earnings forecasts. India’s macroeconomic outlook has strengthened over the last few years due to improvement in fiscal and current account deficits and balance sheet strength in the corporate and banking sectors. This has happened at a time when the overall macroeconomic conditions of many major economies in the world are either deteriorating or at best stable. So, in this context, India has been showing better macroeconomic performance than the rest of the world. Moreover, India’s business cycle has benefited from a credit-led growth cycle, leading to better growth performance compared to the past. Listed companies in India are also benefiting from positive trends such as a revival in investment demand, market share gains from unorganised to organised sectors, higher inflation leading to higher nominal growth, emergence of manufacturing as a new net growth driver, digitisation and financialisation of savings. As a result, listed companies’ earnings growth is now outpacing the overall national growth and India is witnessing a broad-based earnings revival. All these factors are driving growth in the capital market. Some of the above factors are long-term in nature and hence make us constructive on the growth prospects of corporate India. However, a lot of future earnings growth, as well as events like interest rate cuts, seem to be priced into current valuations, which moderates the risk-reward score.

Is corporate earnings growth sufficient to justify current valuations? What will the next few quarters likely look like?
Reported corporate earnings in India are growing faster than overall growth in India due to the factors discussed above. We believe that earnings growth is a very important factor that can drive long-term wealth creation for investors. However, the growth is gradually slowing down due to base catching up, slowing credit growth and also the impact of global slowdown. Hence, in an environment of slowing earnings growth, the scope for PE re-rating is limited and investors need to lower their return expectations.

What do you think about the current craze in the IPO space? Are you seeing good deals?
IPOs help broaden the breadth and diversity of the market. They also enable us to identify unique companies with strong fundamentals. However, as the number of IPOs has increased in recent years, we apply additional filters and favor companies with differentiated business models that are not available in the existing listed universe, with business moats that are stronger than their peers in the listed universe and compelling valuations, leaving a lot on the table for participating investors.

Invesco MF recently launched back-to-back thematic funds. Why are you supporting manufacturing and technology at this point?
We focus on NFOs that we believe offer an opportunity for wealth creation, such as the small-cap fund in 2018 and the flexi-cap fund in 2022. Recent launches such as the manufacturing fund and the technology fund follow the same logic.

Manufacturing companies are benefiting from India’s focus on import substitution, global supply chain changes, increased profitability due to PLI and India’s growing competitiveness in manufacturing. Technology companies are benefiting from growing global technology adoption where technology is becoming the new staple, the beginning of a global rate cut cycle led by the US, improving earnings growth from October 2024 to March 2025, digitalization and India’s growing focus on technology equipment. After a long time, Indian stock market companies are benefiting from multiple themes as highlighted earlier. We believe investors can benefit by focusing on some of these themes.

What other sectors or topics do you prefer?
Our sector exposure is mandate driven. However, we have increased exposure to financials and technology and reduced exposure to industrials due to profit taking. We remain underweight in energy and global commodities.

How are you doing in the mid-cap and small-cap arena right now? Do you see enough room for returns?
We focus more on sustainability and longevity of growth and quality of companies than on evaluating companies based on their propensity to capitalize. There will always be a runway for good companies that have the right valuations.

With the value segment taking the lead in recent years, how are your equity funds positioned?
Our positioning between growth and value is mandate specific. Contra and PSU funds have a stronger value focus. Other funds are a mix of growth and value but with a growth bias. All our funds continue to retain a stronger quality exposure.

Written by Amit Ganatra, Head of Equities, Invesco Mutual Fund