Edited excerpts from a chat with the fund manager:

How has your outlook towards the market and the stocks you own changed after the Q4 results? Given the macro headwinds, do you fear downgrades in Q1?
We have seen a positive surprise in corporate earnings especially in the small and mid-cap space during Q4 FY26, following a strong performance in Quarter 3 as well. While Q4 numbers were resilient, it is very likely that the full impact of West Asia crisis will be more visible in 1Q FY27 rather than Q4 FY26. Many companies were cushioned in the March Quarter, due to adequate raw material inventories, which helped limit supply disruptions and cost pressures.

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In contrast, 1Q FY27 is expected to reflect the lagged impact of elevated crude and natural gas prices, due to raw materials procurement related disruptions and higher purchase cost, currency depreciation and an increase in logistics and insurance cost. These factors could weigh on margins across several sectors.
Additionally, a weaker monsoon remains a key risk, particularly for rural income and demand for certain consumption linked segments. This could further impact demand and potentially lead to some earnings downgrades during the upcoming quarter.
However, with easing tensions in West Asia conflict, we could see some improvement in Q2 FY27 onwards. As a result, while near-term volatility and downgrades cannot be ruled out, the risk to full-year FY27 earnings appears relatively contained at this stage. We expect a sequential improvement in earnings, leading to limited risk to overall FY27 earnings.
Many believe that midcaps are in a sweet spot and the earnings season was also relatively better. Would you agree to that?
As of May-end, we have seen mid and small caps have outperformed the broader indices over a six-month period, including the phase since March 2026 that was impacted by the West Asia conflict.

This outperformance has been driven by strong underlying fundamentals, with earnings growth in the 15%-20% range for mid and small caps over the last two quarters, compared with single digit earnings growth for Nifty.

In our research, certain pockets within the small-cap space continue to exhibit selective mispricing, where fear has compressed valuations more than what fundamentals would justify. From a valuation and risk–reward perspective, we therefore see relatively better opportunities in small caps.

While mid-caps have delivered stronger earnings growth, valuations remain on the higher side. We believe investors need to be particularly selective and mindful of individual investment ideas within the mid-cap segment.

In your flexicap fund, how has your positioning changed towards mid and smallcaps in last 2-3 months?
In our Flexi Cap Fund, we follow a balanced yet opportunity-driven approach across market capitalizations, with a notable tilt towards small caps stocks. Since its launch, the Abakkus Flexi Cap Fund has consistently maintained a higher allocation to SMID stocks at ~50% with ~30% specifically in small caps over the last five months.

This positioning reflects the attractive risk-reward we currently see in quality small-cap names and niche mid-cap leaders. The portfolio is designed with a healthy mix of established leaders and emerging potential winners, supported by meaningful high conviction allocations.

While we remain mindful of near-term volatility, our allocation is driven by bottom-up conviction anchored in our investment philosophy, MEETS framework, and disciplined risk mitigation process. This approach allows us to participate in the most compelling opportunities across the market-cap spectrum while staying aligned with long-term wealth-creation objectives.

From a 5-year view, which sectors are you bullish on and why?
From a medium-term horizon, we remain constructive on financials, pharmaceuticals, discretionary consumption, manufacturing, and select new-age themes.

Within Financials, lending businesses remain resilient, supported by strong balance sheets and improving asset quality. Non-lending financials continue to be a structural play on the financialization of savings in India, along with increasing insurance penetration.

We are particularly bullish on the manufacturing theme, specifically export-oriented and new-age sector linked companies. India’s cost arbitrage in manufacturing, global supply-chain diversification, recently signed FTAs, and strong tailwinds in sectors such as semiconductors, electrical grid upgradation, and private defence, should all help Indian manufacturers.

The consumer discretionary sector is also a structural play on rising income levels and premiumization driven by evolving consumption patterns.

Lastly, we are positive on the pharmaceuticals sector, driven by the increasing focus on innovation by Indian players, the upcoming patent cliff which should provide meaningful opportunities for generic players, and growing outsourcing by global innovators, as seen in the Contract Development and Manufacturing Organization (CDMO) space.

You have been underweight IT and overweight banks. Both haven’t done well. Help us understand your portfolio positioning.

Yes, we have been underweight IT services and marginally overweight Financials as a sector. As of May end, Nifty IT Index has seen a major fall of ~22% over a six month period and has underperformed Nifty 50 by ~12% over the same period.

This has largely been due to a structural shift in technology space, particularly driven by Gen AI and related developments).

Within our Abakkus Investment MEETS framework, we view this as a ‘Trend’ that would require adjustments to business models of Indian IT services firms. In that sense, our underweight position in IT services has worked well.

Within Financials, our overweight positions are largely tilted towards capital market linked plays, which have performed better than banks as a whole.

Over the last six months, as of May end, the Nifty capital markets index is up ~14% compared to a ~9% decline in the Nifty Bank Index.

We attribute this underperformance in banks to aggressive FII selling, despite relatively stable domestic investor flows. However, given recent global macro developments and measures taken by Government and RBI to support currency, we see potential swift recovery in banking names. We remain nimble and will continue to actively adjust our portfolio positioning.

Smallcap stocks appear to be faring better with a few of them even doubling money in a few months despite subdued market mood. In your smallcap fund, how are you positioning yourself in terms of sectoral opportunities?
You are right, as of May end, Nifty Smallcap 250 index has outperformed Nifty50 by ~13% over a three month period. Certain beaten down small cap names have seen sharp rally along with recovery in their growth metrics.

Small cap investing primarily follows a bottom-up approach and that’s how the Abakkus Small Cap Fund is constructed.

We have evaluated opportunities across high growth sunrise sectors, export beneficiaries, companies trading at 30-40% discount to their average valuations with expected growth recovery, and select special situations that can lead to value unlocking.

Accordingly, we have positioned our portfolio to benefit from sectors with strong tailwinds such as electronics manufacturing and its value chain, chemicals, niche engineering companies linked to defence and aerospace value chain, urban construction plays, textiles, gems and jewellery export opportunities and discretionary consumption beneficiaries, along with several other unique small cap ideas.

One of the key strengths of the Indian market is its sectoral depth and diversity, which allows investors exposure to multiple themes.

How bullish are you on AI capex and data centre linked plays in India? Do you think valuations are still attractive?
We believe these are structural themes with multiple years of on-ground investment and execution ahead of us. However, valuations of most AI and data centre investment linked plays in India have run ahead of fundamentals in a very short period of time.

Balancing the strong long-term growth potential with reasonable valuations remains a challenge.

That said, we remain bullish on the space, given it’s a multi-year growth potential. We will continue to evaluate companies based on their fundamental strength and the size of the opportunity, while remaining mindful of valuations.