On midcaps in this volatile markets: Clearly in this calendar year, we have seen mid-caps correct quite a bit, but we have also to see in context that 2014 to 2017 was a kind of golden period for them. At this point, our broad view is that we are kind of neutral between large-caps and mid-caps. I think mid-caps, on an aggregate, are still a bit expensive, but if you think about it, there has been a bit of polarization within them as well. At this point, asset-based mid caps such as cement, real estate, hospital, hotels and power utility, etc., are looking attractive—those that did not do well in the last 3-4 years. So, whether you look at replacement costs or the book value, or those kind of measures, lot of these stocks are quite cheap. Power utility is another segment within that. There, the mid cap valuation seems fair. Of course, in a macro downturn these segments can go to lot of distress value, but the risk-reward from a three-year perspective is quite okay in that.

On fund flows: We are seeing that inflows have held steady for the last couple of months when markets have been really volatile, but at this point it does look, at least the systemic investment plan (SIP) segment, seems quite strong. That is a big positive, given that investors are ready to take on volatility and look at equities for the medium to long-term.

On banks and NBFCs: In general, we prefer the bank structure over the NBFC structure, because the liability side is much more available in banks versus NBFCs. So, even in the mid-cap space, we typically tend to have banks over NBFCs. It is quite clear that when liquidity is tight, these upcoming banks, which consistently need capital because they are growing very fast, will have volatility in their stocks. Although I guess it will be much less than NBFCs. So, you have to be prepared for some volatility, but some of these banks, if they can develop their liability side in terms of CASA (current account, savings account) and lend with good credit culture from a 5-10 years perspective, they are good candidates to become large caps over a period of time. In general, some of these upcoming banks within the mid-cap space, we have a fairly core holding in them.

Market Outlook: It is difficult to predict short-term direction and the magnitude of the move, but conceptually, what I feel is that we have had a period earlier in the year when India’s business cycle went through macro imbalance because of the spike in crude, plus strong consumption. To my mind, today, India seems to be on the verge of becoming stable in terms of macros again, because we have seen a fairly sharp currency depreciation. If you see the last trade deficit number below $14 billion, I think we are slowly getting our CAD (current account deficit) down. To me, the downside today stems more from a global perspective rather than a domestic perspective. I think a lot of positives on the domestic side are being ignored in a time like this. What I feel could be a headwind for next 3-4 quarters is the fact that the US still seems to be the best performing market in the developed world, while EM (emerging market) growth has cooled off. When that happens, you are going to see the US dollar remain strong and US bond yields go up. Therefore, there will be a lot of liquidity pressure on all EMs. Sometimes there could be a debt issue coming out in India sometimes in China, sometimes in some other EM, but we all know that when dollar is strong these thing can come out from any side of the EM. Ideally, for capital markets and EMs to do well, you need to see some softening of US growth, but not be too much, because you do not want US to go into recession. Essentially, US slowing down, dollar easing off a bit, and US bond yields coming off a bit, will be the ideal scenario for liquidity to come back into EMs.