How Four Mega-Reforms by the Indian Government and the RBI Dismantled the Barriers to International Capital.

RBI data reveals a staggering 58% surge in capital outflows from India over the past 5 years. This shift underscores a critical imperative: the necessity of investing in dollar-denominated assets. This is particularly vital given that the INR has historically depreciated by approximately 40% against the USD every decade.

 Portfolio Outlook

 We continue to keep a defensive posture with overweight in cash (through arbitrage funds) and underweight in Indian small cap equity allocation. Our tactical allocation framework suggests slight increase in Indian large cap equity allocation and slight decrease in global equity allocation mainly due to elevated US equity valuations.

 Portfolio Outlook

 Post the portfolio rebalancing in December, weighted average free cash flow yield has increased to 2.2% while average return on capital of portfolio stocks remains higher than that of the benchmark. Portfolio remains positioned to weather uncertainty and benefit from possible earnings upgrades, with defensive allocation to large caps and REITs balanced by meaningful allocation in high quality small and midcap companies.

 Portfolio Outlook

 December was flat for the portfolio and broader market following three years of strong performance. Markets consolidated as investors digested gains, though the earnings backdrop and productivity data remain supportive. A ~15% S&P 500 earnings growth forecast for 2026 has bolstered recent valuation re-ratings, while the AI narrative is shifting from capex toward monetization.

We expect market leadership to broaden beyond mega-caps, benefiting our portfolio’s positioning away from high-valuation segments. However, we anticipate higher volatility; credit spreads are near historical lows and geopolitical risks appear underpriced. While the market remains bifurcated, early improvements in cyclicals—including transportation—are encouraging. We remain watchful and disciplined

 Concentrated portfolio of heavily moated companies that can drive healthy earnings growth.

 Portfolio Outlook

 Looking ahead, we see two distinct tailwinds for CCP constituents. Firstly, the recently announced GST rate cuts are likely to help the fundamentals of our holdings with high exposure to autos and B2C consumption. Secondly, We remain convinced that healthcare services are in the early innings of a 10-15 year structural rise in penetration. Our portfolio is heavily weighted towards organized players in hospitals, diagnostics, and insurance who are best positioned to capture this shift from unorganized to organized care. We expect “Quality” as a style factor to do well over the next few years. As broader economic growth moderates (from Nifty50’s 24% EPS CAGR over FY21-24 to mid-single digit growth over the last six quarters), the gap between average companies and exceptional ones is likely to widen. In such an environment, companies that rely on their own internal strengths—deep moats and prudent capital allocation—to generate growth will stand apart from those reliant predominantly on external economic tailwinds. We remain vigilant regarding one key risk – given the elevated valuations of the broader indices combined with weak earnings growth, a significant market correction remains a possibility.

 Portfolio Outlook

 Given the year long time correction for the broader markets, we are gradually seeing growth companies being available at more reasonable valuations. While our approach continues to be bottom-up, we have reflected our view on stretched mid and small cap valuations by allocating nearly two-thirds of the portfolio to large cap names. In pockets, we are now seeing stock prices baking in more realistic expectations of the future and we are therefore tilting the portfolio towards more growth names vs being more defensive so far. We have a positive outlook on healthcare, private sector financials and select industrial names – we believe our investee companies in these sectors are well positioned to deliver market share gains and profitable growth. We expect fundamentals and growth prospects for our investee companies in the financial services and consumption sector to improve in the second half of the year as the effect of GST cuts, CRR cuts and income tax rate reduction starts to become visible. The risk to our above thesis could be adverse regulation which can curb supernormal profitability of well-run players. On the other hand, we have consciously avoided exposure to energy, utilities, and real estate, given the difficulty in identifying businesses within these sectors that can consistently generate healthy RoCEs. While valuations across the market remain elevated, the moderation seen over the past year is a healthy development. We view this as creating an attractive setup for quality companies.

 Portfolio Outlook

 As CY25 ends, it is an appropriate time to reflect on the performance of the BFSI sector. At the start of the year, expectations were anchored around moderating loan growth, declining NIMs and concerns on asset quality. Contrary to these expectations, banks delivered resilient performance, with risks remaining largely manageable and product specific. This resulted in a strong sectoral outperformance during CY25, with Bank Nifty up ~16%, compared to ~6% for the BSE 500 and ~10% for the Nifty 50. Looking ahead, the earnings outlook for financial services companies appears to be improving, supported by a benign asset-quality environment and a gradual recovery in loan demand. However, risks persist from subdued deposit growth and the possibility of further policy rate cuts, which could pressure bank margins. In this context, we remain selective in our positioning and underweight large private sector banks. While we remain constructive on sector asset quality, growth is expected to be selective rather than broad-based, unlike the FY22–24 cycle. Our focus is on companies that faced asset-quality stress or growth slowdowns over the past 12–15 months and are now positioned for normalization. Additionally, recent corrections in select SMIDs have created pockets of value, which we are gradually incorporating into the portfolio.

 Portfolio Outlook
 

 We continue to deploy cash in the portfolio stocks that have seen steep price corrections. However, this is being done judiciously balancing the risks surrounding the earnings (example – impact of US tariffs etc) and the valuation levels. On the positive side – (i) many of our export-oriented stocks are relatively unscathed from the US tariff impacts due to relatively low contribution (example – Garware) or having localised manufacturing set up (Jash Engineering). (ii) from the recent months exports data – we also see portfolio stocks diversifying their exports beyond the US markets (helping them mitigate the correction in US export volumes). The research team continues to work actively on expanding the investment coverage – giving us the ability to optimise portfolio earnings/valuation.