ETMarkets PMS Talk | A cooling—not a collapse—of the AI trade could be a tailwind for Indian equities: TrustLine CEO

Global markets continue to be driven by the AI investment boom, but stretched valuations in AI-linked stocks have also raised concerns about the risk of a sharp correction.

N. ArunaGiri, CEO of TrustLine Holdings, believes that while a disorderly unwind would hurt markets globally, a measured cooling of the AI trade could ultimately benefit Indian equities by redirecting foreign capital toward fundamentally strong businesses with attractive valuations.

In this edition of ETMarkets PMS Talk, ArunaGiri discusses the principles behind value investing, the importance of margin of safety and cash-flow-driven investing, the opportunities emerging in today’s stock-picker’s market, and the themes that could shape wealth creation over the next decade. Edited Excerpts –

Q) The fund has delivered a since-inception CAGR of 16.4%, substantially ahead of its benchmark. What have been the key pillars of your investment philosophy that enabled this outperformance?

A) Buying right with a significant margin of safety (MOS) and staying committed to high-conviction ideas through market cycles are two of the most important drivers of our long-term outperformance.

The beauty of a margin of safety lies in its dual role. First, it provides downside protection by reducing the risk of permanent capital loss. Second, it becomes a powerful source of alpha as the gap between price and intrinsic value gradually narrows.
In many cases, the market first recognizes and closes the margin-of-safety discount, and only then does the rerating process begin, creating a strong tailwind for returns.
In essence, successful investing often comes down to a deceptively simple act of buying right and sitting tight. While the concept sounds straightforward, the discipline required to execute it consistently – especially amid market volatility and short-term noise – is what separates exceptional investment outcomes from average ones.

Q) Value investing has often gone through extended periods of underperformance globally. How have you stayed committed to the philosophy through different market cycles?
A) Every investment strategy goes through its own favourable and unfavourable seasons. Value investing is no exception. But the same is true for momentum, growth, thematic, and virtually every other investment style. Periods of outperformance are inevitably followed by phases of underperformance.

The key to long-term success is not chasing the strategy that is currently in Favor, but having the conviction and discipline to stay committed to a well-defined process. Constantly switching styles based on the prevailing market narrative is often the surest way to erode returns and inflict unnecessary pain on investment outcomes.

Staying the course has always come naturally to us. It is not a conscious struggle or an act of extraordinary patience- it is simply part of who we are and it is in our DNA. We believe, we are in a way wired to think and act with a long-term perspective.

This allows us to remain steadfast through market cycles, knowing that enduring periods of underperformance is often the price one must pay for achieving meaningful long-term outperformance.

Q) The fund has outperformed sharply over the last one year and six months. What were the key portfolio calls that drove performance during this period? This comes at a time when the whole world is going through geopolitical concerns.
A) Many of our contrarian investments made over the last two years, especially during the pessimism and market correction that followed September 2024, are now beginning to bear fruit. The substantial turnaround in earnings and business performance across several of these holdings has been the principal driver of portfolio returns.

Equally important has been the change in the market environment. The market has gradually shifted from being macro-driven to becoming increasingly receptive to bottom-up stock-specific opportunities. As a result, companies delivering earnings growth and positive business momentum are being rewarded by investors.

The convergence of these two factors- a strong recovery in underlying fundamentals and a more favourable market backdrop for stock picking-has created an amplified positive impact, resulting in a meaningful uplift in portfolio performance, particularly in the current quarter.

Q) How do you define “intrinsic value” in today’s market, where intangible assets and platform businesses command premium valuations?
A) When it comes to investing and valuation, we remain unapologetically old school. For us, nothing replaces cash flow. Whether a business is classified as “new age” or “old age” is largely irrelevant. What ultimately matters are its ability to generate and grow cash flows over time.

Our assessment of intrinsic value is anchored in the long-term growth of underlying cash flows. We have always believed that sustainable wealth creation comes from owning businesses that can consistently compound cash flows, rather than chasing narratives or market excitement.

Equally important is staying within our circle of competence. We are comfortable passing on opportunities that we do not fully understand and prefer to focus on businesses where we possess the experience, insight, and analytical edge to reasonably assess the drivers of future cash-flow growth.

Fortunately, the opportunity set today remains rich. With an increasing number of bottom-up opportunities emerging across sectors, there is no shortage of high-quality businesses available at attractive valuations for patient, long-term investors.

Q) Small-cap stocks have witnessed significant volatility over the past year. Are valuations now becoming attractive from a value investor’s perspective?
A) At the aggregate index level, small- and mid-cap stocks are not inexpensive, particularly after their stellar run during June. Valuations remain elevated and continue to trade at a meaningful premium to their long-term historical averages.

However, index-level valuations often mask the divergence beneath the surface. At the individual stock level, we continue to find a healthy pipeline of contrarian opportunities that satisfy our stringent valuation and margin-of-safety requirements. As always, our focus remains on businesses rather than benchmarks.

More importantly, the market environment has increasingly evolved into a stock-picker’s market. Broad market moves are becoming less important, while company-specific fundamentals, earnings trajectories, and business execution are once again driving returns. This is precisely the kind of environment in which bottom-up, value-oriented investing tends to thrive.

For investors like us, who rely on fundamental research and contrarian stock selection, the current backdrop is both constructive and rewarding. We have no complaints.

Q) What are the biggest risks you see for Indian equities over the next 12-18 months?
A) More than domestic risks, we are closely watching the possibility of a spill-over from any severe correction in global equity markets, particularly if the AI trade begins to unravel.

Valuations in several AI-linked segments of the US, Korea, and Taiwan markets have become increasingly stretched, raising the risk of a meaningful reset if expectations fail to keep pace with reality.

The ideal outcome for India would be a cooling – not a collapse- of the AI trade. A moderation in investor enthusiasm could facilitate healthy sector rotation and redirect capital toward several neglected sectors where valuations and expectations are far more reasonable.

Interestingly, such an outcome could prove to be quite positive for India. A cooling of the AI trade may trigger a contrarian rotation by global investors, particularly FIIs, who have largely remained on the sidelines of Indian equities while chasing AI-driven opportunities in other markets.

As capital begins to look beyond a narrow set of AI beneficiaries, investors may increasingly rediscover markets offering a broader opportunity set, stronger domestic growth drivers, and more reasonable earnings visibility. In that context, India could emerge as an attractive destination for incremental capital allocation.

Paradoxically, a moderation in AI-related exuberance elsewhere may end up becoming a meaningful tailwind for Indian equities.

The challenge, however, is that markets rarely correct in a neat and orderly fashion. Excesses are typically unwound through periods of sharp volatility, forced de-risking, and indiscriminate selling. When that happens, even markets and companies with strong fundamentals are not spared in the short term.

This risk of a disorderly adjustment in global markets remains one of the key monitorable for us.

Q) If you were constructing a portfolio today for the next decade, what themes or sectors would be difficult to ignore?
A) One of the most distinctive features of the Indian market is the sheer abundance of opportunities across sectors. Investors do not have to chase the theme of the day, the latest trend, or the hottest sector to find attractive investment ideas. The opportunity set is far broader than that.

Given India’s favourable demographics, rising formalization, increasing productivity, and the relatively early stage of its economic growth cycle, opportunities with long growth runways can be found across almost every corner of the economy. Many businesses today have the potential to compound earnings and cash flows for years, if not decades.

Having said that, emerging sectors such as sustainable solutions, renewables, green energy, electric mobility, data centres, and digital infrastructure are likely to produce a larger pool of opportunities than mature industries. These areas are benefiting from structural shifts that could reshape the economy over the next decade.

For us, however, sectors are merely hunting grounds. Whether an opportunity emerges from a sunrise industry or a traditional business, what ultimately matters is the same: the quality of the business, the sustainability of cash-flow growth, and the valuation at which we can participate in that growth.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)