Axis Mutual Fund's Karthik Kumar: Momentum is my contrarian bet for next 12 months

Axis Mutual Fund’s fund manager Karthik Kumar believes momentum could surprise investors as a contrarian theme in the next 12 months. Despite recent underperformance amid tariff and policy uncertainty, he expects the strategy to rebound. Kumar also highlights opportunities in NBFCs, consumer discretionary, renewables and defence, while urging investors to diversify across styles.

Edited excerpts from a chat:

How are you currently positioning your portfolios amid global headwinds related to tariff and domestic tailwinds from GST, rate cuts, etc?

The macro and policy environment domestically & internationally has seen dynamic changes through the year. While tariff headwinds have been in the news for some time and hence has given us the time & understanding to position ourselves accordingly, GST related developments though positive for the economy, are quite recent. We still await details and clarity on a few areas before acting on it.



However, even prior to the GST boost, we have maintained an overweight in the consumer discretionary segment through retailers, hotels, travel and tourism. We believe that the discretionary segment is well positioned to benefit from strengthening domestic momentum and lower interest rates. This coupled with lower tax rates may likely provide consumption a fillip. Further, Travel and hospitality have been holding well despite weather and geopolitical disruptions.

That aside, we are overweight the financial sector, particularly NBFCs. Further we are overweight in the pharmaceutical segment, although we have been reviewing it in light of the uncertainty regarding tariffs and pricing issues in the US. Lastly, Renewable capex, power transmission/distribution companies and defence are the other themes in the cyclical space that we like.

Sensex, Nifty have failed to beat bank FD in the last one year. Do you think that most of the time correction is behind us and that the growth trajectory should be back soon?

While market returns over the short term and particularly over the last one year has been tepid but when seen in the context of the overall cycle it has been quite a journey over the last 5 years or so. Particularly post-Covid lows, our markets have consistently managed to beat most developing and developed markets largely in-part due to a robust growth differential to world markets.

As a result, our valuations in absolute & relative sense look expensive and the growth differential is also narrowing as the higher base catches up. In this context, it is only natural for the markets to take a breather. We see possible time correction over the short term due to moderating economic growth, revisions to earnings expectations and the ongoing tariff uncertainty. However, India continues to be a medium- to long-term growth opportunity, underpinned by its strong domestic consumption-driven economy. Good Kharif crop, pro-active steps by the RBI coupled with impending GST reforms by the government could provide the necessary fillip that the economy and markets need.

What are your quant models telling you about sectoral opportunities lying ahead of us?

Quant models come in various flavours and the stocks and sector preferences would depend on the nature of the model. For instance, our momentum fund the Axis Momentum Fund is bullish telecom, health care primarily led by hospitals, and financials. While it is bearish on staples, consumer durables and energy. While on the other hand Axis Quant Fund which is based on a multi-factor / GARP approach is also bullish on Industrials and in particular power transmission & distribution, defence and airlines.

Given that the NFO of Axis Nifty500 Quality 50 Index Fund is currently open, why do you think it’s a good time for the quality factor to work?

The aim is not to time the style but instead offer investors an avenue to gain exposure to a style that we as a house have been a vocal supporter of. Quality companies are typically market leaders that demonstrate consistent performance, financial stability, and a durable competitive advantage. Quality is one of the essential tenets of investing and our markets, barring the last few years, have rewarded quality stocks quite well. Given that markets are now trading at optimal valuation across Large, Mid and small cap space, we believe, one needs to focus on quality to identify pockets that can retain and improve on growth and return prospects.

FII selling has created pressure on Indian equities. We saw Q1 earnings season doing little to change investor opinion. When do you think we can expect broad-based double-digit earnings growth once again?

We have seen a moderation in economic activity over the last few quarters and that is visible in quarterly earnings as well. However, we expect a good monsoon season, healthy reservoir levels and promising kharif crop sowing to support rural consumption. That aside, proactive policy steps by RBI including interest rate cuts and liquidity loosening coupled with GST rate rationalisation should aid recovery in growth.

How should mutual fund investors balance out their style exposure in a portfolio to make money across different market cycles?

Investors should look to diversify their portfolio across styles. These individual styles like quality, momentum etc can be seen as parallel to sectors in thematic investing. Individual sectors have their own secular positive and negative cycles with slightly elevated volatility compared to diversified funds. Similarly, these individual styles will also experience their own cycle. Hence diversifying would help navigate market cycles better from a risk and return perspective

Lastly, what's the one contrarian idea you’d back for the next 12 months?

I would pick momentum to be that one contrarian idea over the next 12 months. It has been a strong performer over the last 5- and 10-year period with outperformance of mid-single digits over Nifty 500 (as on 31st Dec 2024). However, it has had a reasonable drawdown over the last 6 months as the underlying market drivers, that the momentum signal relies on, changed early this year in part due to the policy and tariff uncertainty induced by the west. As things settle, we expect momentum strategy to recover and perform better than broader markets.