ETMarkets Smart Talk: Harshad Patwardhan, managing Rs 1591 cr AUM, offers playbook for creating wealth with sector-focused strategy

Time of India

24-04-2025

In this exclusive interview with ETMarkets Smart Talk, Harshad Patwardhan, the Chief Investment Officer at Union Mutual Fund, shares his valuable insights on navigating
volatile markets
and creating
wealth
through a sector-focused
investment strategy
.
With a formidable track record of nearly 3 decades and Rs 1591 crore in assets under management (
AUM
), Patwardhan walks us through his approach to managing risk, capitalizing on domestic-oriented sectors, and staying ahead of
market
fluctuations.
Drawing on his extensive experience, he reveals how sector selection—especially during periods of global uncertainty—can make a significant difference in building long-term wealth.
From proactive positioning to identifying opportunities in overlooked sectors, Patwardhan's playbook for success is designed for investors aiming to maximize returns in the current economic landscape. Edited Excerpts -
Link to Livestream: FY26 Bets: Where's the Growth?
Kshitij Anand: What a month it has been for equity markets—a tad bit of confusion created enough anxiety for equity investors across the globe. We have seen big swings on either side. How are you reading into all this?
Harshad Patwardhan:
Yes, absolutely. I mean, Liberation Day turned out to be much wilder than anybody had imagined. Yes, crazy stuff. But a few interesting things are emerging from that, and I will restrict myself to things that pertain to India.
Clearly, it is a given that there will be volatility in the weeks and months ahead, because a 90-day extension was given, followed by negotiations. So, a lot of to-and-fro will definitely happen.
I would say that more than a silver lining from India's perspective—in fact, I would go to the extent of saying that when the dust settles, I won't be surprised if people look at India, in the context of global developments, as possibly one of the safe havens. And I'll tell you three or four reasons for that.
One, clearly, the Government of India took very proactive steps. They probably anticipated what might happen. If you recall, Prime Minister Modi visited President Trump within weeks of him assuming office, sometime in the second or third week of February.
So, on the trade side, India has taken very proactive steps. Our commerce minister was there, and I would say that India is really trying hard to get some kind of bilateral trade deal with the US, which will hopefully mean less threat of reciprocal tariffs.
Secondly, even if you assume that takes time and reciprocal tariffs were to come, India is still better placed than many of the competing markets, for two reasons.
One is that if we look at the reciprocal tariffs that were announced (which are now deferred by 90 days), India is better placed compared to countries like Vietnam and Bangladesh—two countries with which India competes on certain products like textiles. So, India is anyway better positioned.
Thirdly, India is predominantly a domestic consumption economy. If you look at our reliance on exports—particularly goods exports, as we are currently talking about a trade war on the mercantile side, not the services side—India is better placed because it is a large, domestically oriented economy.
To that extent, we are less exposed compared to smaller countries, where the business model primarily depends on exports.
Also, we talked about the potential bilateral trade deal with the US, but India is also in the process of negotiating bilateral deals with the EU, the UK, and many other countries.
India being a large economy and market actually gives us bargaining power—we can offer market access on certain products in return for access in their markets. So, there's something we can negotiate, given our size.
Another important point is that we are witnessing a significant shift. After 40 years of globalization, we are now entering a new paradigm of de-globalization. We're talking about bilateral—not multilateral—trade deals.
We're negotiating with the EU separately, the UK separately, the US separately. India has much more bargaining power than many smaller economies.
Additionally, going into this crisis, India's macroeconomic situation is far better than it was in many previous crises.
I vividly remember 2013—I'm sure you do too—when the taper tantrum struck. India was listed among the 'Fragile Five' economies. Now, we are much more robust and resilient.
And lastly, from a market perspective, our markets no longer solely depend on foreign investors. Over the last four to five years, Indian investors have emerged as a big counterbalancing force to foreign investors.
So, in summary, I would say I wouldn't be surprised if strategists begin to talk about India, amid all this current chaos and de-globalization, as something of a safe haven.
Kshitij Anand: I have been talking to a lot of fund managers, be it from the PMS or mutual fund space, and many of them have actually tweaked their portfolios recently to handle tariff-related volatility. So I just wanted to get your perspective—have you done anything differently to really combat the volatility we are seeing in April?
Harshad Patwardhan:
So, April, of course, came as the month when the reciprocal tariffs were announced. But the fact that there would be some action on the tariff side was well advertised—even during the campaign trail, President Trump wasn't hiding what he wanted to do in that regard.
So, to that extent, I would say we were already partly positioned in the portfolio, with more weightage given to domestic-oriented sectors that are not really affected by what happens elsewhere. That said, yes, the 2nd of April brought a pretty dramatic development.
So what we're doing is, wherever we had outsized bets, we've reduced them, because we know there will be a lot of to-and-fro—what gets announced as policy might be reversed the next week, and so on. At this point in time, we believe it is pragmatic to reduce our outsized bets on either side.
Kshitij Anand: Volatility in the equity markets is one thing, but how are you looking at the Q4 results from India Inc.? In fact, the RBI also mentioned a slowdown in growth, and with tariff-related worries kicking in, there could be a ripple effect that might hit the Indian economy due to other countries going for reciprocal tariffs. What are your views on that?
Harshad Patwardhan:
I would say the fourth quarter is expected to be very lacklustre in terms of year-on-year growth, but that frankly has little to do with tariffs.
Kshitij Anand: More of a seasonality factor?
Harshad Patwardhan:
Yes, the tariff impact will unfold in the future. Just to recap, this year was generally slow in terms of economic activity and corporate earnings because we had elections, and there was a slowdown in government capex.
Over the last several years, one of the main drivers of the economy has been growth in government capex.
But this time around, government capex is actually lower—or at least its growth is lower—which was expected. So this quarter, as well as the full year FY25, earnings growth is much more modest compared to what we witnessed over the last three to four years.
Since the pandemic, we had a period until FY24 when earnings doubled from FY20 to FY23. Compared to that, we're probably going to see single-digit growth this year. On this base, I would say the next couple of years are going to be decent—we'll likely see double-digit, maybe low teen, growth rates.
Yes, reciprocal tariffs will have an impact, but that will be more industry-specific. So let's assume the reciprocal tariffs come back after 90 days and there's no major resolution.
Two to three things could happen. One, tariffs go up, and you may actually see some products getting diverted away from the US—particularly from China, because the reciprocal tariffs imposed on China are very high.
Those products may start flooding other markets, and some sectors may clearly face adverse impacts as a result—such as metals or chemicals. The government will need to decide how to protect domestic manufacturers in response.
But there's also another side. Assuming the reciprocal tariffs do come into effect after 90 days without much change, the process is likely to be very disinflationary for the rest of the world, due to dumping that might happen elsewhere.
As a result, many domestic-oriented businesses and sectors could actually see a reduction in raw material costs, and their margins might expand. So, when we talk about the overall impact on corporate India, there will be some winners and some losers. We'll have to assess the net impact accordingly.
Kshitij Anand: In fact, April also marks the beginning of the financial year FY26. So, if one has to do asset allocation this month—I know it's turning out to be a volatile month and it's pretty uncertain at this point what is going to happen—but yes, if somebody wants to, let's say, invest ₹10 lakh right now, and the person is in the age bracket of, say, 30 to 40 years, with an investment horizon of about three to five years, and considering we're also talking about a low interest rate environment because the RBI just reduced rates by 25 basis points—with a high probability of further rate cuts due to the slowdown—what would you advise?
Harshad Patwardhan:
So, at this stage, actually, many asset classes—speaking only in the context of India now—appear attractive. I've already listed the reasons why I believe we're turning more constructive on the equity side.
We had turned cautious to negative around September last year, but now we're becoming more optimistic about Indian equities.
I would say we are in the midst of, or perhaps just past, the period of maximum uncertainty. From here, things will likely get clearer and better in the Indian context.
So, I am constructive on the equity side. I would say that for anyone looking to allocate money from this point onward—since volatility will still be present—we are recommending SIPs in smallcap, midcap, or innovation-oriented mandates, because this year is going to see a lot of fluctuations and developments.
For other mandates, such as flexicap or multicap, I would recommend an STP over the next six months or so. By that time, we would have gone through several events and more clarity is likely to emerge, making the STP approach more suitable for those schemes.
On the other hand, if we look at multi-asset mandates, which are built on diversification, all three components—equity, fixed income (which looks attractive due to expected rate cuts), and gold—currently look appealing. So, I would say a lump sum investment in a multi-asset scheme at this point is a good
strategy
.
Kshitij Anand: And what about valuations? We've actually talked about valuations so much over the last year. I think before the recent fall, there were concerns that the markets were overheated. And yes, we did see some correction in double digits, especially in the benchmark indices. Do you think the recent fall has pushed valuations closer to their long-term averages, or are we still slightly expensive compared to global markets? What are your views on that?
Harshad Patwardhan:
Yes, valuations have corrected over the last six months. For largecaps, valuations are now a little lower than long-term trading averages.
But I must add that valuations have not yet reached a level where they can be considered a no-brainer. They're a little below the long-term average, but frankly, we didn't really have a valuation-related problem with largecaps to begin with….
Kshitij Anand: …in the small and midcap space.
Harshad Patwardhan:
That is correct. The excesses were more evident in the mid and smallcap segments, and there has been a fair bit of correction. However, I wouldn't say they have reached a value zone or a no-brainer level.
That said, from an economic cycle perspective, the last six to seven months have been a period of cyclical slowdown. I would imagine that, somewhere in the next couple of quarters, we will likely move past this phase and enter a cyclical upturn.
Given the reasons I've mentioned earlier, I would say it's fair to conclude that we are more constructive on the markets now than we were six months ago.
Kshitij Anand: Now, let me get your view on sectors. I mean, which sectors are on your radar for FY26? We've discussed a lot of variables—tariff-related worries, interest rate concerns, and so on. So, which sectors are you watching at this point in time?
Harshad Patwardhan:
In this period of chaos and uncertainty, there are a few sectors—mainly domestic-oriented—that I had alluded to earlier, where trade wars are not likely to significantly impact prospects. I'll list a few.
For example, telecom. Telecom is driven almost entirely by domestic dynamics, and things are looking positive there. Then there's cement—it's a commodity, but a domestic one.
You don't expect dumping of cement from China, for example. So, cement, telecom, and a few consumer-oriented sectors also stand out. In the latter, due to global disinflationary trends and resulting raw material cost reductions, gross margins may expand—even if volume growth doesn't pick up much.
These are the sectors where conditions are likely to improve. However, let me quickly add that, in periods of uncertainty and panic, there tend to be opportunities on both sides.
What often happens is that the obvious 'gainer' sectors attract a lot of attention, while investors abandon the ones that are negatively impacted.
For a portfolio manager, this creates valuation excesses in both directions—areas where we might want to trim exposure, as well as places where everyone is exiting, creating attractive entry points.
So, while we will definitely focus on sectors relatively immune to trade wars, we'll also be looking at contrarian opportunities across the board, depending on how things evolve.