Market: Fund manager talk | The market may stabilize and gain momentum in the fourth quarter: Meeta Shetty from Tata Mutual Fund

Tell us about the rationale behind launching the Tata India Innovation Fund and what strategy you will pursue.
The rationale behind the launch of the Tata India Innovation Fund focuses on the growing importance of innovation across industries. The idea was inspired by observing extensive changes in products, services and business models over the decades. This transformation trend continues to grow as companies increasingly reevaluate and innovate their offerings and operations to address structural challenges or take advantage of new opportunities. By focusing on this evolving landscape, the Fund aims to reap the benefits of such innovative changes.

In terms of strategy, Tata India Innovation Fund plans to select stocks that exhibit transformative changes driven by innovation. This includes identifying companies that stand out on a product, service or business model level. The goal is to build a portfolio aligned to these potential innovation-driven opportunities, ultimately aiming at long-term alpha generation.Many technological innovations are driven by smaller companies. How comfortable would you be investing across different market caps?
While it’s true that smaller companies have driven a lot of technological innovation, we see innovation happening in all areas – not just smaller companies. When people hear “innovation,” they often think it has something to do with technology or intensive research and development, but innovation is far broader than that. It happens at all levels, from something as simple as a bar of soap to travel systems as complex as Vande Bharat.Large companies are also actively innovating. For example, a large FMCG company recently adjusted the content of its soap products by 25%, allowing it to now offer competitive prices despite rising input costs. Similarly, major food delivery and apparel brands are redesigning their product lines and operations to remain agile and relevant in the market. Therefore, innovation is not just limited to small companies. It is spread across different market capitalizations.
This fund is designed to be flexible across all market caps as we find compelling, innovation-driven ideas at every level. We will likely exclude certain sectors with high capital expenditure, such as: B. Raw materials in which the scope for innovation is limited. Otherwise, I like to navigate across market caps as our goal is to capture innovative value wherever it arises
Given that Donald Trump is expected to return as US President after a gap of four years, what impact do you see on Indian IT exporters?
With the impending return of Donald Trump, we can expect some potential impact on Indian IT exporters. The last time, in 2015 and 2016, the focus was on stricter visa regulations. In response, Indian IT companies adapted by hiring more local employees in the US, which has since balanced their dependence between visa-required employees and local talent. This change means that companies are now much less vulnerable to visa problems.

Additionally, Trump’s proposed corporate tax cuts could have a positive impact on Indian IT companies. A lower tax rate would increase cash flow for US-based companies and potentially lead to higher spending on technology and digital services – a sector in which Indian IT companies play a key role. Given the recent subdued IT growth rates, this policy could potentially act as a new growth lever for the industry.

Do you think optimism about the Trump presidency is strong enough to take Nifty to a new record high?
Certain sectors such as IT could potentially benefit significantly if proposed tax cuts and tariffs for neighboring countries come into effect. Additionally, manufacturing stories, such as the “China plus one” strategy, could become more prominent and provide further opportunities. However, it is important for the Indian market to recognize the current weakness in second quarter earnings on various fronts. A recovery in earnings, particularly in the third and fourth quarters, is necessary to account for any significant market gains driven by infrastructure spending in the final months of the financial year.

FII outflows have been one of the main reasons for the market decline in the last few weeks. Are foreigners more worried about weakening valuations and earnings growth or is it just about trade with China?
The recent outflows are due to a combination of factors. About a month and a half ago, Indian markets were trading at high valuations, around 23 times earnings, which coincided with several developments: the weakness of the Indian market in the second quarter, China’s emerging growth story with attractive valuations, and China’s recent stimulus measures. In these circumstances, it appears that tactical bets were made on China rather than India due to its attractive valuation. However, for foreign investors to take the currency risk and choose India, our growth and valuation prospects need to be made more attractive and aligned with global market conditions. The recent correction in India was influenced by a mix of valuation concerns, slowing growth and external developments in China.

How bad do you think the second quarter earnings season is as many NSE 100 companies delivered disappointing numbers?
The second quarter earnings season has indeed revealed significant weaknesses, particularly in the investment-driven sectors and urban consumption. These two areas have presented significant challenges. Looking ahead, however, there is room for improvement, particularly as infrastructure spending is expected to increase. As we approach the fourth quarter, infrastructure investments should address some of these vulnerabilities, potentially strengthening these sectors and improving earnings results.

Have most of the declines in profits already been factored into the price or is there still more trouble ahead?
We expect there will be a partial recovery in the third quarter and that the fourth quarter could be significantly stronger. This recovery trajectory should help stabilize market sentiment after recent downgrades in the first and second quarters, but we could see further slight adjustments in the third quarter. Market sentiment is expected to improve by the fourth quarter as infrastructure projects progress and government spending increases. Longer term, earnings expectations for FY26 remain intact. Although there may be short-term volatility, particularly in the third quarter, we expect the market to stabilize and gain momentum by the fourth quarter, assuming fiscal spending and growth prospects align as expected.