Mirae Asset CIO Neelesh Surana on Market Outlook and Fund Strategies

Mirae Asset Investment Managers (India)’s equity funds have experienced a period of underperformance—the first major blip since inception in 2007. Chief Investment Officer Neelesh Surana speaks to Sanket Dhanorkar on his market outlook and fund strategies.

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Q. How are you assessing the market scenario after the last two years of time and price correction?

Since the September 2024 peak, the Nifty 500 has declined by approximately 5%. However, stocks are far cheaper than this headline figure suggests. Valuation measures such as price-to-book (P/BV) and price-to-earnings (P/E) ratios have fallen by 25-30% or more, depending on the sector, as earnings and book values grew even as prices stagnated. Going forward, our house view remains positive. Much of the negative news is already priced in. Even before the correction triggered by the West Asia conflict, a price value gap had emerged. Valuations that were expensive two years ago are now reasonable to attractive, reflecting the cumulative impact of tariffs, the West Asia crisis, foreign institutional investor (FII) selling, and concerns over currency and monsoons. The economy is on a recovery path, supported by monetary and fiscal measures. The combination of favourable prices post-GST 2.0, lower Equated Monthly Instalments (EMIs), and higher disposable income from tax cuts, government support, and the pay commission should drive consumption revival. Balance sheets across government, corporate, banking, and consumer segments have remained strong. Overall, corporate earnings, which have been muted over the past 18 months, are poised to revert to low double-digit growth. The margin of safety has thus increased, as valuations for most businesses have corrected while the earnings outlook has improved. Over the next two years, multiples could expand by 10- 15%, and thus index returns are likely to be slightly above long-term averages.

Q. How did you navigate your fund portfolios amid this correction?

We found enough value in the market even before the West Asia crisis. We were never in cash and remained fully deployed. As a fund house, we now have multiple asset managers. But on two core aspects of portfolio construction, which are stock selection and portfolio construction, the overall approach remains the same. The emphasis is on buying quality at a reasonable price. We don’t buy quality at a higher price or buy low-quality because it is cheap. We internally define quality in terms of two yardsticks. Growth should be more than nominal GDP growth; the higher, the better. And pre-tax return on capital employed (ROCE) should be at least 15%. It is almost cast in stone that the bulk of the portfolio should be invested in quality businesses, provided we do not overpay for them. In recent months, several quality stocks, particularly private sector banks, have corrected not because of any deterioration in fundamentals, but largely due to sustained selling by FIIs. We have been buying these names as we believe high-quality businesses are now available at reasonable valuations. It is a large overweight in the portfolio; in other words, we own more of these than the index does. There are many other quality businesses that boast high ROE, but are very expensive. So, we are underweight in those names because they don’t meet our criteria.

Another aspect is portfolio diversification, where 40-45 stocks account for 80-85% in most of our funds.

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With this template, there are strong chances of outperforming the benchmark and peers over a longer term lens. We keep fine-tuning processes to achieve greater consistency.

RAPID FIRE

Q. One investing rule you never break.

Stick to quality stocks and let the numbers speak louder than the narratives.

Q. Missed opportunity or bad investment, what haunts you longer?

A bad investment lingers longer—errors of commission, i.e. actual loss hurt more than errors of omission.

Q. A previously held belief or theory on markets/ valuations that no longer holds true?

The idea that valuation risk and large drawdowns are exclusive only to the smalland mid-cap segment.

Q. The toughest decision you had to take as a fund manager.

Spotting and acting on a governance red flag is the hardest call for any fund manager.

Q. If markets could talk, what would they say to investors today?

Maximum money is made when investments are made in tough times—much like today.

Q. A trend or theme investors are underestimating.

The mean-reversion potential in a few unloved sectors/ stocks, including some large blue-chip companies. It is like solving the easiest question first in an exam.

Q. If your portfolio were a Bollywood movie or song, what would it be titled?

Chak De India” — a portfolio built on backing India’s broader growth story as a team effort, not just a few star performers.

Neelesh Surana

CIO, Mirae Asset Investment Managers

Q. Did your style bias lead to the recent underperformance?

The market phase and style do impact performance. If you recollect, 2023 and early 2024 were a phase when the market moved too fast and wasn’t cheap. In such phases, having both consistency of style and consistency of performance is difficult. Coincidentally, some of our large active weights did not do well in that period. The fact that many of those businesses have now come back strongly shows that most of the decline was in stock prices, not in the businesses themselves. In other words, the damage was on paper. It was not a permanent error of wrong allocation in the wrong set of business, valuation, or management. So, in that context, there was no big learning for us because this was a passing phase. Having said that, there were errors of omission. These were mostly about what we sold early, which continued to do well. We now pursue more graded exits. There were smaller learnings in how we pursued slightly different investing styles within the same template. Most of our equity funds faced a downturn during this phase. So we went for less synchronisation across strategies; different styles within the overall framework. We also emphasised that portfolio deviation should be slightly higher within the universe.

Q. What are the red flags you are looking to avoid now?

We are under-weight or neutral in two areas: good businesses that are expensive or where growth is uncertain. There are great businesses in capital goods, infrastructure, defence and electronics manufacturing services (EMS), but most of them are expensive. We may look at these later if there is a time/price correction. The second basket includes consumer staples and Information Technology (IT) services where there are too many unknowns. In IT services, we see structurally low growth over a long period of time. The valuation is cheap, but we are not very confident in terms of where the sector is heading in the context of AI-led disruption. We are learning and adapting as things play out. For now, we are marginally underweight in this space. In the consumer sector, we see longer-term growth in discretionary rather than staples. Beyond these buckets, we are finding enough value in most sectors. We like private banks, life insurance, and oil and gas. Consumer discretionary is not only a strong long-term play but also positive in the near term. Within that, bottom-of-the-pyramid consumer discretionary has struggled since Covid-19, whether in footwear or building materials. But large-ticket consumer discretionary items, including automobiles, are in good health. We also continue to own pharmaceuticals. Within that, Contract Development and Manufacturing Organisation (CDMO) is a good piece.

Q. What is the risk-reward scenario across market capitalisations?

Today, there are opportunities in all three segments. Only FIIs have sold large caps heavily. So, large caps have got burnt and are a bit cheaper because they have been oversold. But an important point to consider is that many businesses which are present in the mid- and small-cap segments are not available in the large-cap space. So, the first filter should not be size; it should be the choice of businesses. One-third of businesses are not available in the Nifty basket.

Further, it is a misnomer that valuation risk only applies to the small- and mid-cap basket. Look at large-cap IT services. I think it is very stock-specific rather than sector-specific. Over the long term, one should have small- and mid-caps for wellrounded representation of different sectors. For example, if there is a turnaround in the bottom of the pyramid over the next 3-5 years, many businesses that are sector leaders are not even present in the mid-cap space. These are not tiny companies anymore. The scale and size of opportunity has changed dramatically in the last five years. A lot of formalisation is taking place in this cohort. So, we see opportunity across all three segments of the market.

Q. How has your investing framework evolved? Any areas you have had a change of thought?

In our profession, there is always some fine-tuning of processes and thinking. But generally, I have seen that buying quality and not overpaying for it does work over long periods. There are learnings along the way. For me, one learning is that when taking a sell decision, it has to be graded. If the earnings momentum is maintained, then what is expensive can become super expensive. We had some of those names in our portfolios a few years back. So, if the earnings momentum is maintained, then the selling should be phased out over time. In portfolio construction, we have fine-tuned how we classify businesses. For example, the investment side of the economy, including capital goods or defence, were not part of the benchmark until 7-8 years ago. In the index, they were hardly 2-3%, but collectively they were a large portion. They were segregated as separate businesses, but not identified as overarching themes. We reclassified these businesses, helping us identify which sub-segments will do well if the economy investment piece were to do well or if consumer exports were to do well.

Q. This market correction has fuelled narratives that retail Systematic Investment Plans (SIPs) lead to inferior outcomes.

SIPs instil the right mindset for wealth creation: it takes time. In a growing economy, equities will build wealth over time. SIP is a non-emotional decision. In a lump sum, the same amount can carry emotional weight. Investors get myopic and feel anxious. SIP is more disciplined. It instils the rigour of asset allocation. It works well in a static or falling market, but you only see the benefits when markets rebound. The benefits of what you accumulate during a global financial crisis, taper tantrum, demonetisation or Covid-19 in the form of higher units, become evident only later. It is good that investors understand SIPs work better in downturns. This can only be understood by experiencing it. When you have two bad years, a lot of theories emerge, and the downside tends to get amplified. Equity is a superior asset class, but there is no guarantee that you will earn good returns every year. SIP helps normalise these phases over time. Lastly, the return threshold is much lower in other asset classes. In India, interest rates are headed lower. Alternatives like Fixed Deposits (FD) are very taxinefficient. The hurdle for post-tax return in equities is not much.

Q. How do you see the opportunity in Specialised Investment Funds (SIFs)?

We have taken a conservative approach to SIFs starting with a hybrid offering, Platinum Hybrid Long-Short Fund. It will provide a better post-tax return than alternatives such as an arbitrage fund. There will be very nominal open equity exposure in this product. This is our flagship product in SIFs.

We are not in a hurry to launch more offerings, such as funds that will take short positions. It’s a function of what capabilities the fund house brings and the merit of the theme.

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