Large-cap stocks are presenting a clear rotational opportunity as underlying business earnings recover and outpace stock performance, according to Taher Badshah, Chief Investment Officer at Invesco Mutual Fund. The damage to stock prices in several large consumer-facing and financial services franchises has been significantly larger than the actual impact on their earnings.
“Businesses are actually outperforming stocks by a significant margin,” Badshah observed, highlighting a dichotomy in the market. While the Nifty index might appear down by about 10% year-on-year, a closer look at individual constituents reveals that earnings momentum is recovering.
For the first time, valuations have fallen below average, and corporate earnings are trending 2-5% higher than expectations across both the Nifty and the broader market. This upgrade cycle, though modest, suggests the market has moved past the recent downgrade hump, providing merit for larger enterprises to trend higher.
For incremental deployment, financial services and banks are compelling, a move that also facilitates a return to large-cap exposure. Technology is another favoured sector where Invesco has been steadily building positions within its value strategies. The tech index has performed strongly over the past six months, now outpacing the Nifty on a year-on-year basis and demonstrating an ability to mean-revert.
The healthcare space has also corrected significantly in recent times, creating fresh buying opportunities.
Despite the renewed focus on larger companies, the fund house remains an active participant in the mid and small-cap space. A substantial portion of alpha-generating opportunities still resides in these broader market constituents from a three-to-five-year perspective.
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Banks, IT and healthcare offer investment opportunities amid market recovery: Taher Badshah
Within the electronics manufacturing services (EMS) theme, the market is currently taking a measured stance even though the broader opportunity remains intact. Valuations for the four to five companies sharply positioned in this space have historically been strong, but they are now undergoing transitions and balance sheet corrections. Consequently, these stocks may require more time and absolute price correction before making a comeback. On gold loan companies, the fund house is holding off, as real interest rates are expected to trend higher for a while longer, which will likely weigh on precious metal prices.
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