JioBlackRock CIO Rishi Kohli decodes Nifty’s inflection point after two years of weak returns

After two years of largely flat returns, the Nifty may be approaching an inflection point as valuations, FII positioning and sector leadership begin to shift. JioBlackRock CIO Rishi Kohli says largecap stocks have de-rated by around 10%-15% from their long-term averages, while Indian banks have significantly underperformed global peers despite stronger growth prospects.

The next phase may not be a broad-based rally. Kohli expects the market to remain volatile, with IT still facing a difficult medium-term outlook, while banks and other largecap sectors could eventually pull the benchmark higher. “If banks and a few other heavyweights start performing, the broader indices should do well,” he said.

Edited excerpts from a chat:


The nascent recovery in Nifty that we saw after the Q1 earnings season has now petered out. Do you think we are staring at another round of downturn?

The big drivers have been the oil spike and, of course, bond yields — that's what has made markets take a step back. That said, earnings have come in much better than we were originally expecting, so the backdrop has actually improved compared to last year, even on a quarter-on-quarter basis.

But we are affected by the global macro, and that's feeding into the local macro as well. Domestic yields are now above 7% — 7.15%, a level where they've stopped twice before — but given where global yields are headed, there's a good chance they go higher. The FCNR step RBI took was positive for the currency and the external deficit picture, but excess liquidity is now becoming a problem of its own, because it isn't being absorbed easily.

So there's a combination of factors creating uncertainty, and markets dislike uncertainty more than they dislike bad news itself — that's really the bigger worry.

What about yields specifically, do you expect that to settle down too?

Oil should settle down eventually; it's just a matter of when. Yields are trickier, because we're clearly not in a rate-cutting cycle; it's an upswing. But interestingly, some analysis we've done shows that rising yields, if they rise gradually, have historically not been a problem for markets — in fact, markets have gone up alongside rising yields most of the time.

Looking at US bond-yield sensitivity specifically, where there's more data and research available, the pattern is that markets only get rattled when yields move by more than roughly 1.5–2% on a rolling 12-month basis. A 25-bps move here, and there isn't what's driving the current volatility; this looks more like an initial scare.

There's been a lot of chatter about yields hitting 5%. How serious is that concern?

Honestly, the concern exists mainly because yields haven't been at that level in a long time. Aside from that, the broader environment of declining, low rates that we saw for years is clearly over, and rates have been rising for a while now — so I wouldn't be too worried beyond a point. There will be more volatility as that 5% level gets tested, and some of it will tie back to geopolitics and crude oil.

The other worry is the AI companies. Some of them keep delivering earnings growth, so I'm not too concerned there, but valuations across the board have risen, and I expect more dispersion going forward — as that plays out, we'll get a clearer read on what's really happening.

On that note — how do you read Anthropic's call for slowing down AI capex and spending, and its impact on Indian IT services on one hand and power-capex names on the other?

Everyone making these statements globally may have their own vested interests, so it's hard to take them at face value. I'd take it with a pinch of salt.

On Indian IT, the known issues remain — this isn't something that resolves overnight. A few companies leading on AI-related projects have already outperformed, while for the rest, especially largecaps, growth is at its lowest ever. So while PEs look cheaper, once you adjust for that low growth, valuations on a PEG basis aren't as attractive as they seem. That overhang isn't going away immediately, though companies are adapting — it's more of a medium-term story that plays out over two to three years, not two to three quarters.

For the near term, expect these bounces and declines to continue. A few months back, near the lows, I'd expected a roughly 10% bounce, which happened; then it pulled back, and now it's bounced again on this news. I think we're in the early phase of an "L-shaped" pattern — a lot of volatility within a broad range before the medium-term recovery, driven by fundamentals, plays out.

How are you positioned on power-capex names and IT?

For context, our larger fund, FlexiCap, is very benchmark-aware — every stock's weight stays within roughly plus or minus 2–3% of its benchmark weight (a bit wider, around 3%, for larger names, and about 1.5–2% for smaller ones). So there's an active bet on every stock, which is what drives our active share, but we're never going to be meaningfully overweight or underweight any single name — including in IT.

Our Sector Rotation fund is a much smaller product and works differently. In Sector Rotation, IT has been a consistent underweight since the fund launched — close to the maximum allowed, typically between 2.5% and 3.5%.

And what's been the largest overweight in the Sector Rotation fund over the last month?

Pharma has been the biggest overweight, followed by banks. Right now the fund invests across all stocks in an overweighted sector, weighted by free-float market cap, rather than picking individual names within it — that's a second-phase idea for us. Within our subsector framework, there are really two buckets under healthcare: pharma, and hospitals/healthcare services. Both have been overweight, though the larger pharma bucket more so.

In the FlexiCap fund, what's your largecap weighting?

Around 65%, and it's ranged between 60% and 70%.

Given that largecaps have underperformed for the past year, wouldn't it make sense to actively reduce that largecap weight, even within a benchmark-aware framework?

That would be a discretionary view, and ours is a very different, systematic methodology. One has to understand why we've built it that way. Piece has indeed underperformed over the last year. In mid- and smallcap, we've actually carried larger weights, skewed more toward smallcap than midcap, because that's where the process can take bigger bets — not that we're making discretionary calls, but the process itself allocates more there, even though the tail is long, with a lot of very small positions. That's what gives the fund stability while still preserving the ability to outperform.

Largecaps not doing well is why we're roughly in line with the benchmark rather than showing outperformance. If largecaps do start to outperform, that would help — but timing these cycles is genuinely difficult, and if I tried to time it on a discretionary basis, that would defeat the purpose of running a systematic process. The design assumption is that there will be periods where any strategy underperforms, but that underperformance should never be large — the original logic was that we'd never go more than 3–4% negative alpha versus the benchmark in a tough patch, and in practice we haven't gone beyond roughly 1.5%.

That discipline showed up clearly during the volatile Feb–April period tied to the war — and that's true for systematic strategies globally; you saw quant funds get whipsawed globally in that stretch too, similar to the "quant winter" of 2018–19. A systematic process isn't going to change overnight just because of short-term volatility, so there will be periods of underperformance — the goal is simply to keep that underperformance small, which we managed to do. It's only been about ten months live: a strong first three months, then three or four tough months, and now we're tracking close to the index. As more cycles play out, the positive alpha should start showing up more clearly. Day to day, what we watch is whether the low-volatility, low-alpha target the model is built around is holding — you can't judge a medium-to-long-term model by comparing it to the market every single day.

For an investor thinking about putting money with you, what kind of returns should they realistically expect?

We're not claiming to run the single best fund in the category. Some funds are explicitly inconsistent — there will be periods of very strong performance and periods of weak performance, but the aim is a strong alpha over a ten-year horizon. What we're doing is different.

In Indian mutual funds — as distinct from PMS or AIFs, where taxes eat into any extra alpha — the best fund in the FlexiCap category generates something like 3.5% alpha, not 5–6–7%. Our model has been built to target that same roughly 3.5%, and I personally discount whatever the model says by about 25%, since I tend to be conservative.

So even if we land at 2–2.5% alpha — not the single best number in the category, but consistently ranking 4th, 5th or 6th — with meaningfully lower volatility and downside protection, that's the best outcome for investors, and it's the philosophy behind these products.

Going forward, as a fund house, we'll offer the full spectrum of risk-reward profiles. The overarching goal is the best risk-adjusted return: lower active risk and tracking error alongside alpha comparable to the best funds. For something like Balanced Advantage, we're benchmarking tracking error to competitors and aiming for better alpha on top of that — I don't want to sacrifice returns to get there. In FlexiCap and Sector Rotation, our first products, we deliberately went the other way: control the risk, and even if we're not the single best but third, fourth, fifth or sixth in that cohort, we're happy with that.

The reason we started that way is retail — we were trying to reach small towns and small ticket sizes, where investors in even the best-performing but volatile funds tend to get the timing wrong, buying and selling at the worst moments. Consistency reduces that greed-and-fear cycle, so even a fund that's a percentage point behind the category's best can end up delivering better realised returns for retail investors than that top fund does.

And the long tail in the portfolio helps with that consistency too?

Exactly — a concentrated, high-conviction portfolio has no way to avoid being volatile if it wants that alpha. That's a very new concept for India, so it'll take a year or two for people to fully accept it. But the logic held up through our tough patch — underperformance never exceeded roughly 1–2%, which is a lot of downside protection.

What's the fund's typical churn or turnover?

Turnover has run at roughly 3% a week, in line with what we said at launch — which works out to about 150% a year. That's largely a function of the long tail: a lot of smallcap names sit at very small weights, so when the model goes underweight on them they effectively drop to zero, generating a lot of entries and exits in the smallcap names, and larger percentage-weight changes in the bigger names when the model shifts, say, from 1% overweight to 1% underweight.

A lot of mutual fund investors feel that FlexiCap funds haven't delivered, especially compared to the double-digit returns in midcap and smallcap funds. What would you say to an investor who's disappointed?

It comes down to asset allocation and risk management. Mid- and smallcaps have had a good run, but there have been periods where they've done very badly too — doing well recently doesn't mean they'll always do well. That's the whole rationale for a flexicap product that blends all three market-cap segments; different fund managers run very different philosophies within that, some actively rotating between large, mid and small. A mix of two or three different flexicap styles can actually work well in a portfolio.

An investor doing pure mid- and smallcap needs to balance that with largecap or balanced-advantage exposure elsewhere, and having some sector-rotation or flexicap exposure alongside that makes sense too — sector rotation is interesting because it offers a different kind of alpha, sector-based rather than stock-based, which is really its own form of asset allocation, alongside large/mid/small and multi-asset or commodities. Products like SIF and Balanced Advantage occupy their own place in that bucket as well. It ultimately comes down to an investor's own risk and return needs and how the math works out across these different products.

On largecaps specifically, after two years of essentially flat returns, do you think we're at an inflection point now?

It looks that way. Valuations have de-rated to roughly a 10–15% discount to the 10–15 year average, depending on the period you use, and relative valuation ratios between small/mid and largecaps — whether on fundamentals or technicals — look stretched. FPI positioning points the same way: the FPI selling of the last two years was concentrated in banks and technology, which is why the index overall hasn't moved much, since those are large index weights.

Banks in particular look like they're at some of the best valuations we've seen — specifically large private banks. PSU banks have had their run and aren't looking bad, but private banks now look considerably more attractive. PSU banks used to trade at a discount because private banks had a growth premium; as PSU growth caught up and legacy NPA issues got cleaned up, PSU valuations re-rated, but that growth has now stagnated again while private banks' growth is picking back up.

On a relative basis, Indian banks have actually done okay versus the Nifty over the last two years, even though absolute returns have been disappointing. But versus global banks — emerging or developed market — Indian banks have underperformed by anywhere from 35% to 100%, depending on the benchmark, which doesn't make sense given that Indian banks trade at lower P/E, lower PEG (given higher growth expectations), and ROEs comparable to the better emerging-market banks. That gap is the kind of setup that eventually draws long-only and hedge fund flows rotating out of global and EM banks into better Indian names — and if that trade plays out, given banks' large index weight, it would lift the largecap indices meaningfully.

IT remains tricky, as discussed, but if banks and a few other heavyweights start performing, the broader indices should do well — and outside of banks and IT, plenty of other stocks and subsectors have already done well and should continue to.

There's a view in the market that private banks, FMCG and IT — the sectors that drove growth over the last two to three decades — are approaching a saturation point. Do you agree?

For FMCG and IT, yes — that's part of why they've been underperforming, and it isn't an easy environment. FMCG remains more of a defensive play; even with recent income tax and indirect tax cuts, FMCG volume growth still isn't in double digits, though some FMCG names have started to bounce during the recent market weakness.

Banks are different — I'd argue there are still interesting pockets there. NBFCs and fintechs are giving banks real competition in parts of the business, and within NBFCs specifically there are some very interesting names. Overall, banks, NBFCs and capital-market plays look attractive for the long run — I called out banks specifically because of the valuation data points and their large weight in the indices, so a largecap index recovery will depend partly on the banking index turning around.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of The Economic Times.)