A $3 billion fund at Kotak Mahindra Asset Management Co. is backing Indian defense stocks, wagering that geopolitical tensions will boost local arms production and support the government's efforts to lower reliance on imports. According to data compiled by Bloomberg, the $60 billion money manager's Kotak Large and Midcap Fund has beaten 98% of peers in the last five years, with industrials and financial stocks making up more than half of the portfolio. The fund added radar maker Astra Microwave Products Ltd. in March, the worst month for Indian equities since the pandemic, and counts State-run peer Bharat Electronics Ltd. as a top holding.
Indian defense firms have rallied in recent years on the back of policy support to boost domestic production and the government's focus on local procurement and capability building. As reported by Bloomberg, a defense sector measure representing companies from aerospace to missile makers has delivered more than 50% average returns over the last three years, outperforming most sectoral gauges in India. The sector is already benefiting from stronger order pipelines and improving execution visibility, with recent global conflicts driving further defense investments. Evolving warfare trends, particularly the increasing use of electronic systems, are also driving sustained demand for domestic players.
According to Bloomberg, Harsha Upadhyaya, chief investment officer at Kotak Mahindra Asset Management Co., said the geopolitical environment will likely accelerate the shift toward domestic defense production, strengthening the long-term investment case for the sector. Recent global conflicts will drive further defense investments, with evolving warfare trends, particularly the increasing use of electronic systems, driving sustained demand for domestic players. However, Indian stocks have underperformed their regional peers since the start of 2025, mainly due to worries over slowing earnings growth while geopolitical challenges continue to hurt outlook. As reported by The Economic Times, MSCI Inc.'s gauge of Indian shares is down more than 5% this year versus an 11% advance in its Asian measure.
Despite the defense focus, Upadhyaya remains bullish on defense but has kept portfolios diversified amid volatility, staying fully invested while selectively adding to preferred sectors. As reported by Bloomberg, financial stocks also look attractive after recent market drops, with the sector having come under pressure since early March due to the central bank's tighter currency trading rules and a sharp selloff in HDFC Bank Ltd. Recent additions in this space include beaten-down private lender IndusInd Bank Ltd., along with shadow lenders Shriram Finance Ltd. and Bajaj Finance Ltd. Despite the challenges, steady credit growth and a stabilizing interest-rate outlook should aid financial sector shares, with financials being available at reasonable valuations even before the recent fall.
