IT sector can still create wealth but is no longer a monolith: Rishabh Nahar, Fund Manager at Qode Advisors

Beyond tariffs, the biggest challenge for equity markets is likely to be tightening liquidity and the shifts in global capital flows. We are at a point where central banks around the world are recalibrating their stance, and markets are reacting sharply to even small cues on interest rates.

In India, domestic retail flows have remained a strong buffer for the market over the last couple of years, but rising global bond yields and changing risk appetite among foreign investors could begin to test that resilience.

From our perspective at Qode, we think investors will become more selective in the near term. Valuation gaps are likely to widen as the market starts rewarding companies with strong balance sheets, steady cash flows, and predictable execution.

Businesses with stretched valuations but no corresponding earnings growth could find it harder to attract capital. We expect the broader market to stay volatile, but quality is likely to emerge as the clear leader, much like we’ve seen in previous phases of liquidity tightening.

Our investment philosophy is centred around identifying long-term trends and backing businesses that can consistently execute and turn those tailwinds into results. We are not chasing themes for the sake of it, but these are the areas we are particularly constructive on:

We remain very focused on execution and financial quality. Even in these themes, we back companies that demonstrate consistent returns on capital, strong governance, and the ability to reinvest for growth.

Markets generally cheer a rate cut, as it signals lower borrowing costs and a growth-friendly stance. Sectors like real estate, autos, and BFSI tend to be the first to react positively. However, the market’s reaction this time will depend heavily on the context, especially after what we saw this time with the US Federal Reserve keeping rates unchanged when a cut was widely expected.

This divergence between the RBI and the Fed isn’t new. The last time the RBI cut rates, the Fed had also held steady. If the RBI decides to go ahead with a cut again while the Fed remains cautious, it will raise questions about the drivers behind India’s policy move. Is the RBI acting preemptively to sustain domestic growth, or is it responding to signs of softer demand in the economy?

If the cut is seen as a forward-looking measure, markets could read it as a strong vote of confidence in growth and liquidity, which may support a sustained rally. But if investors interpret it as a response to emerging weakness, the reaction could be more tempered, particularly since global central banks are not yet in easing mode.

We are currently underweight in areas where valuations have run ahead of fundamentals. Some parts of the consumer staples and FMCG space fall into this category. While these companies are strong franchises, earnings momentum has been muted, yet they continue to trade at premium multiples. That mismatch makes us cautious.

We are also staying light on highly cyclical sectors such as metals and non-integrated commodities. These industries have limited pricing power and are heavily influenced by global demand trends, which remain uncertain at this stage. In such environments, earnings can swing sharply, making it difficult to maintain consistent returns.

At Qode, we rely on a disciplined, model-driven approach. We look for businesses that consistently deliver on earnings quality, capital efficiency, and reinvestment capability. If a sector or company doesn’t meet these filters, we don’t hesitate to reduce exposure, even if it’s currently in market favour.

The BFSI space has become highly divergent. It is no longer a “one-size-fits-all” sector. We’re seeing clear differences between institutions; some have clean balance sheets and diversified portfolios and are growing retail lending steadily, while others are grappling with stressed wholesale exposures and rising credit costs.

We remain positive on private sector banks and NBFCs that have a strong underwriting culture, robust capital adequacy, and growing digital capabilities. We’re also watching some of the newer fintech-integrated NBFCs with interest, provided they demonstrate sustainable profitability and are not just growing at any cost.

On the other hand, we are cautious on PSU banks and lenders that are chasing aggressive growth in unsecured segments or wholesale lending. With credit costs rising from cyclical lows, even a small slip in asset quality can have a disproportionate impact on profitability, which is a risk we want to avoid.

We believe the IT sector can still create wealth, but the days of blanket investing across the sector are behind us. The traditional IT services model is facing headwinds due to slower discretionary spending from global clients. However, within the sector, there are pockets of strong growth, especially in areas like digital transformation, AI integration, cybersecurity, and cloud services.

Our focus is on companies that have differentiated offerings, strong intellectual property, and the ability to scale profitably in these high-growth areas. We tend to avoid firms where revenue growth is flattening, attrition is high, or the business model lacks clear differentiation.

In short, the IT sector is no longer a monolith. Selectivity and a long-term lens are key. For investors who can identify the right businesses, there are still opportunities for meaningful wealth creation.

We evaluate new-age companies through two lenses: unit economics and scalability. It’s encouraging to see that many players have shifted their focus from just chasing market share to achieving profitability, which is a sign of maturity in the sector.

• Rising digital adoption across sectors and demographics

• Supportive regulatory infrastructure like UPI and ONDC

• The ability to scale cost-effectively using technology and data-driven models

• Regulatory uncertainty in certain segments

• Execution risks as companies scale up

• The need to build sustainable cash flows, rather than just topline growth

We like businesses where growth is accompanied by improving margins and high customer stickiness. Those that are still dependent on cash burn or unsustainable subsidies are ones we prefer to avoid. Over the next few years, we expect the winners in this space to consolidate their position as stronger, more profitable franchises.

If you’re in your 20s or early 30s, the single biggest advantage you have is time, and compounding rewards time far more than timing. Start investing early, even if the amounts feel small. You don’t need to fully “understand the market” to begin; what matters most is building the habit of consistency.

Be disciplined with your savings and investments. A small monthly investment, done regularly and wisely, can turn into serious wealth over time. Avoid the temptation of chasing fads or “hot tips.” Instead, build your portfolio around frameworks and strategies that are backed by data and driven by discipline, the same approach we follow at Qode.

Lastly, focus on learning. Learn about the markets, yes, but also about your own risk appetite and behavioural biases. The ability to stay calm during market volatility and stay committed to your plan will do more for your wealth than trying to predict the next big opportunity.