In an interaction with Yogesh Patil, CIO - Equity, LIC Mutual Fund

"A diversified equity portfolio comprising well-managed companies with scalable operations, a focus on capital efficiency, and strong earnings growth is likely to offer long-term stock appreciation for investors," explains Yogesh Patil, CIO - Equity, LIC Mutual Fund

With inflation easing and rate cuts already underway, how do you see the evolving macroeconomic environment influencing equity market performance over the next year?

Since inflation is expected to remain low, we anticipate interest rates to trend lower. This should positively impact the economy by stimulating demand and supporting GDP growth. We expect corporate earnings growth to gain momentum in the medium term, driven by lower financing costs and renewed demand. Additionally, the low base of corporate earnings growth in FY25 should help. The anticipated pickup in earnings and the subsequent earnings upgrade cycle are likely to be supportive of stock prices.

What’s your core investment philosophy, and how has it evolved over the years?

Our investment philosophy aims at identifying and investing in stocks of companies that exhibit strong management, scalable business models, reasonable earnings growth, and capital efficiency. We prioritise companies whose leadership demonstrates integrity, vision, and the ability to effectively execute strategic plans. Scalability is another critical factor we consider. It has two dimensions: first, the sector in which the company operates should have a sufficiently long enough growth pathway.

Second, the company should be capable of expanding its operations and increasing market share without a proportional increase in costs. This scalability often leads to higher profitability and sustainable growth over time. Earnings growth is the cornerstone of our investment strategy. A company's ability to generate increasing profits is the primary driver of stock performance in the medium to long term.

In summary, a diversified equity portfolio comprising well-managed companies with scalable operations, a focus on capital efficiency, and strong earnings growth is likely to offer long-term stock appreciation for investors. Over time, we have realised that remaining anchored to absolute valuations may not be the most effective approach to managing money in a high-growth economy.

What is your sectoral outlook in the current climate, particularly for high-export segments such as electronics, pharmaceuticals, automobiles, and metals, given the rising concerns around global tariffs and protectionist measures?

High tariffs in the pharmaceutical sector, particularly on generics, are unlikely to be sustainable, as they would lead to increased costs for U.S. patients and, in some cases, potential drug shortages. If these tariffs persist and are not reversed, pharmaceutical companies may resort to scaling back their U.S. portfolios—or even exiting the market entirely—once options like passing on the higher costs are exhausted. Conversely, if such tariffs are applied universally across all countries, Indian pharmaceutical companies could leverage their cost advantage, positioning themselves as strong contenders.

Tariffs must be seen with a relative lens across sectors, including electronics. India has 26 per cent reciprocal tariff, while consumer electronics manufactured in China faces 54 per cent tariff. This disparity has, for instance, compelled companies to redirect orders to Southeast Asia, India, or Mexico, ultimately benefitting India. However, unlike the automotive industry, the challenge in electronics lies in the reliance on importing basic materials from China. India must act swiftly to decouple its electronic supply chain from China to mitigate this risk.

In the metals sector, the proposed hike in safeguard duty is likely to benefit India's ferrous segment. However, non-ferrous players face risks due to a global slowdown, with LME (London Metal Exchange) aluminium/alumina prices under pressure. This is an evolving situation and India’s policy response must also be studied carefully to assess the impact on each sector. Though the tariffs are country-specific, not all companies within a sector will necessarily be affected, as some may have differentiated supply chains.

What’s your take on corporate earnings in Q4FY25? Do you believe the results will be compelling enough to attract FIIs back to Indian equities?

Many investors, especially the FII (Foreign Institutional Investor), are driven by the evolving macroeconomic environment, political uncertainties and policy-level challenges from the U.S., over Q4 corporate earnings. The market correction since September 2024 was influenced by three main factors: (1) weak Indian economic data in Q2FY25, (2) disappointing corporate earnings in Q2 and Q3FY25, and (3) FIIs being drawn to more attractive valuations in China and appealing opportunities in the U.S. This led to FII outflows amounting to Rs 2.07 lakh crore between November 2024 and February 2025.

However, DII inflows of Rs 2.67 lakh crore helped to offset these outflows, preventing a more severe market correction. Through 9MFY25, Nifty registered 8 per cent YoY growth in EPS, 4Q is also expected to follow a similar trend. Looking ahead, FY2026 is expected to be stronger, supported by several positive factors such as the resilience of domestic demand in India, the Government’s focus on boosting consumption through tax cuts, a lower interest rate environment, and improved liquidity in the system. These factors should contribute to a better earnings growth outlook for India compared to China and the rest of the world. This may attract foreign flows to India.

Many stocks are currently trading at significant discounts to their 52-week highs. How can one tell if a stock correction is just a short-term dip or signals a fundamental weakness?

Focusing on current prices and their discount to respective 52-week highs makes little sense for investors. It is more prudent to focus on a company’s earnings growth over the next two years and whether the prevailing valuations justify the current price. Market corrections often present opportunities to add attractively valued growth stocks to portfolios, which can be rewarding for most investors.

With growing interest in focused investment strategies, how suitable are thematic funds for retail investors looking for differentiated exposure?

Thematic funds are typically positioned to capture structural sectorial opportunity spread over the 10-15 years. As these funds focus on specific themes or sectors, they may witness higher volatility compared to diversified equity funds. Therefore, thematic funds are appropriate for investors willing to take higher risks in return for higher potential returns over the medium to long term.

Disclaimer: The opinions expressed above are of the author and may not reflect the views of DSIJ.