Raj Bhan expects corporate earnings to grow 12-15% annually over the next three years, barring any major global disruptions. He likes large private sector banks and sees value emerging in consumer discretionary and durables.
He said the first quarter earnings season marked the first broad-based improvement in corporate performance in several years, while foreign investor selling has created attractive entry points in high-quality businesses.
“The fundamentals, which are the earnings, which drive markets, are falling into place after two or three years,” Raj Bhan said. “We can look at earnings trending maybe about 12 to 15% over a three-year period from here.”
Foreign institutional investor (FII) selling has also improved valuations across market capitalisations, particularly in large-cap stocks.
“When you have a starting point of valuations in your favour, when you have earnings on your side, then I think the probability of better outcomes over the next three, four years increases dramatically,” he said.
Largecaps become more attractive after FII selling
Raj Bhan said valuations have corrected across largecap, midcap and smallcap stocks over the last two years, making quality businesses available at more reasonable prices.
He noted that foreign selling has been concentrated in largecap financial stocks, creating opportunities in companies that now trade at more attractive valuations than in the recent past.
According to him, the market has undergone a broad valuation reset even as earnings have continued to grow, improving the overall risk-reward equation.
Private banks top sector preferences
Among sectors, Raj Bhan identified large private sector banks as one of the most attractive investment opportunities.
He said many quality lenders are now trading at valuation multiples rarely seen in recent years.
“Very rarely have you been finding these entities at this kind of valuations,” he said, adding that some private banks are trading at levels somewhat closer to a PSU bank multiple.
Consumer discretionary, staples also back in focus
Raj Bhan also sees value emerging in consumer discretionary, including consumer durables, hotels and services, after a prolonged period of weak demand and valuation correction.
He said improving rural demand, tax benefits and company-led initiatives are beginning to support volume growth.
The fund manager also believes the outlook for consumer staples has improved after several years of subdued performance.
“Growth recovery is not being imputed,” he said. “When earnings rebound, the cycle surprises on the upside.”
IT services valuations ignore recovery potential
Raj Bhan said IT services remains one of the weakest-performing sectors over the last two years, but believes the market has become overly pessimistic about its growth prospects.
He argued that valuations do not reflect even modest revenue growth and said companies that adapt their offerings around artificial intelligence could benefit as artificial intelligence (AI) adoption expands.
“Markets have decided that these are declining businesses forever,” he said. “But some of the AI companies which transition themselves… would mean a lot of new business for the incumbents.”
Cautious on capital goods, prefers power utilities
While remaining positive on the long-term outlook for the power and industrial cycle, Raj Bhan warned that many capital goods, power equipment and transmission companies already reflect optimistic growth assumptions.
He said valuations in several industrial companies are priced to perfection after a sharp re-rating and advised investors to be selective.
Within the broader power theme, he prefers power utilities, saying they continue to offer reasonable valuations despite growing electricity demand.
Gold still has a place in portfolios
Raj Bhan said the sharp gains seen in precious metals last year have moderated, but gold and silver continue to play an important role in portfolio allocation.
He does not expect outsized returns from the asset class in the near term but believes precious metals remain relevant given global uncertainty and market volatility.
“I think the role of gold and silver as asset allocation partners within portfolios remains very high,” he said.
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