Earnings Outlook
- FY24 EPS +24% on high base; FY25 muted due to base effect & GST-cut shift to Q3.
- Recovery from H2 FY26; FY26 growth ~10%, FY27 at 16–17%.
- Earnings downgrades bottomed, sector divergence continues — tactical positioning key.
👉 Flattish phase over; earnings momentum improving through FY27.
Valuation Landscape
- Large Caps: Near long-term averages; ROE at 15%, valuations reasonable.
- Mid Caps: ~0.5σ above average, >20% EPS growth supports valuations.
- Small Caps: ~1.5σ above average; stretched but growth strong.
- India–EM premium eased from 100% → 65%; scope for catch-up returns.
👉 Valuations fair post time correction; large & mid-caps offer best entry points.
Flows and Macro Startup
- Domestic SIP flows steady; FII rotation to cheaper EMs largely over.
- India’s EM index weight at record low, limiting further outflows.
- GDP growth 6.5–7.8%, capex improving, credit growth rising to 13–16%.
👉 India in expansion phase; FII inflows likely to resume in 12–18 months.
Business Cycle Fund Positioning
- Expansion phase stance: Overweight cyclicals (capex, finance, consumption).
- Zero defensives (pharma, FMCG).
- Core themes:
- Capex: Defence, power, capital goods.
- Finance: Lending + non-lending (NBFCs, insurance, wealth).
Consumption: Boost from GST cuts, pay hikes, tax relief.
👉 Dynamic top-down + bottom-up approach; higher mid/small-cap tilt.
Risks
- Elevated small-cap valuations.
- Consumption recovery tied to policy follow-through.
- FII inflows depend on global EM rotation stability.
Key Rakeaways
- Earnings upturn from FY26–27.
- Valuations reasonable, large & mid-caps preferred.
- Flows turning supportive; India remains in expansion cycle.
- HSBC Business Cycle Fund positioned for next leg of growth via capex, finance & consumption themes.
