(Bloomberg) -- In a stock market where nerves have been rattled by a slowing economy and a crisis in the lending sector, Axis Asset Management Co. believes it is worth paying more for shares of high-quality companies.
“What is doing well and has the potential to keep doing well will be reflected in stock prices,” said Chandresh Nigam, chief executive officer of the fund house, which manages one trillion rupees ($14 billion) of assets. “It is a winner-takes-all market.”
The strategy has paid off for Axis. Its largest fund, Axis Long Term Equity Fund, has delivered an annual return of over 12% over the past five years, beating 96% of peers. Its Axis Focused 25 Fund has returned 21% in the past year, outperforming 98% of its competition.
The preference for quality has been a feature of India’s $2.1 trillion stock market for more than a year as investors seek the safety of the strongest balance sheets. While the S&P BSE Sensex has risen 13% this year to a series of record highs, the rally has been led by a handful of heavyweights. The broader market has trailed, with gauges of small and medium-sized companies in the red.
Quality can be expensive. The Sensex is trading at 19.5 times estimated forward earnings, above its five-year mean of 17.1 times.
India’s economy probably grew 4.6% last quarter, which would be the slowest since the first three months of 2013, according to the median estimate in a Bloomberg survey before the data is released Friday. While efforts have been made to alleviate the bad loan crisis, consumption remains sluggish.
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For market breadth to improve, economic growth outlook needs to improve. “While a growth recovery doesn’t look imminent, we believe that the deceleration trend is close to bottoming out,” CLSA India analysts wrote. A “pro-growth stance” by policymakers will help the rally spread to the board market, they said.
Nigam expects a recovery next fiscal year, “but a slower one”. For now he’s content to spend more on good stocks.
“Great businesses are edging out everybody else,” he said. “They are getting much higher multiples.”
(Updates with analyst comment in seventh paragraph)