As FY27 begins on a volatile note amid geopolitical tensions, rising crude oil prices and concerns over interest rates, investors are grappling with uncertainty over near-term market direction.
In this environment, Nimesh Chandaninvestment director, Bajaj Finserv Asset Management Limited believes that while near-term headwinds may weigh on earnings and sentiment, the broader structural story of the Indian economy remains firmly intact.
In an interaction with Kshitij Anand of ETMarkets, Chandan points out that the current market corrections have brought valuations closer to fair levels, thereby creating opportunities for long-term investors willing to look beyond the short-term noise.
It identifies the financial, industrial and Health care as key sectors poised to benefit from the ongoing recovery in India’s economy and credit cycle, supported by improved earnings visibility and reasonable valuations.
He also advises investors to remain disciplined – either by deploying lump sum capital if they can absorb the volatility, or by adopting a laddered approach via SIPs or STPs – while maintaining a minimum investment horizon of three years. Edited extracts –
Q) Thanks for taking the time. We started FY27 on a volatile note due to geopolitical concerns, rising oil prices, possibility of higher interest rates, etc. Where do you see the markets heading?
A) Unfortunately, it appears we are facing a slowdown in an otherwise strong year of growth. Due to geopolitical concerns and rising oil prices, it is possible that there will be some slowdown in economic growth and profit growth in the first half of the year.
A slight drop in profits cannot be ruled out if this crisis lasts a little longer. If this war in West Asia resolves quickly, as is currently expected with the ceasefire, it is possible that there will not be a significant decline in earnings for FY27.
Our basis remains that the Indian economy, the business cycle and the credit cycle are on the rise. We are optimistic about earnings growth in FY27 and FY28. We are currently trading below the intrinsic value of the Nifty 50 index.
Q) What should investors who are planning to invest fresh money, say Rs 10 lakh, do in the markets? What should the sectoral distribution be?
A) Investors who can handle short-term volatility can invest a lump sum now. Valuations are fair, but due to the geopolitical crisis there could be short-term volatility. Other investors can stage their investment via STP (Systematic Transfer Plan) or SIP (Systematic Investment Plan).
However, they must have a vision of at least three years when investing in the stock markets. From a sector perspective, we like the financials, materials, industrials, healthcare and consumer discretionary sectors. We believe that large private banks, as a category, are available at good valuations.
We were positive on the pharmaceutical sector, particularly on CRAMS (Contract Research & Manufacturing Services) and hospitals. We are equally weighted on Consumer Discretionary as we are positive about the long-term outlook for the sector.
However, we are selective in this sector, evaluating companies based on the potential impact of high energy and materials prices on them. Within industry, we prefer defense and energy.
Q) FIIs remained net sellers in Indian equity markets, withdrawing Rs 1.6 lakh cr. What will reverse the flows?
A) The trade agreement between India and the United States has helped to stem the REIT capital outflows that India has witnessed over the past year. However, the recent escalation of geopolitical tensions in the Middle East has triggered a new phase of exodus.
Given India’s heavy reliance on imported crude oil, growing uncertainties over oil prices tend to weigh on investor confidence in the near term.
That said, we view this as a transitional phase. As the geopolitical situation stabilizes and the recovery gains momentum, the relative attractiveness of India’s valuations compared to other emerging markets should support a recovery in FPI flows.
The key variables to watch remain the evolution of the crisis in West Asia and the moderation of crude oil prices.
Q) How do you see the currency developing in the coming months?
A) The INR has seen a sharp correction, first due to tariffs, FPI capital outflows and now the surge in crude and rising gold prices. We are the largest gold importers in the world and most of our crude requirements are imported. These exert strong pressure on the INR.
If the geopolitical crisis subsides and crude prices calm down, we believe pressure on INR could ease at these levels. The decline in INR is also an opportunity. Our contrarian view is that this currency depreciation will create huge export opportunities for the Indian manufacturing sector.
Q) You have seen many market cycles and I am sure this one is no different. Things we should avoid doing right now?
A) Obviously, investors should avoid being afraid in these stock markets. We did a very simple analysis at Bajaj Finserv AMC. We have observed that markets correct each time crude prices exceed $100 per barrel.
Investors who took advantage of this correction to invest made healthy returns in almost all cases over the next three to five years.
Therefore, the only thing investors should not do at the moment is panic, fear or be very short-sighted. This is a good opportunity from an equity investor’s perspective due to valuation corrections. Investors need to focus on the fundamentals, be patient and stick to their asset allocation plan.
Q) How do you see gold and silver performing in FY27?
A) Gold and silver have already seen a strong rally, and from there returns are likely to be more measured than sharply bullish. These assets should be viewed primarily as portfolio hedges rather than return opportunities.
Gold is expected to continue to play its role as a key diversifier, particularly amid continued global uncertainties.
Silver, on the other hand, could remain relatively more volatile due to its closer connection to global growth and industrial demand.
At this point, investors should avoid chasing the precious metals rally and instead use them strategically within their portfolios for diversification purposes rather than aggressive return expectations.
Q) After the recent correction, do you see Indian markets trading at reasonable valuations compared to developed or emerging markets?
A) From 2021 to September 2024, Indian markets outperformed other emerging markets by 70-80%. Since then, the Indian has underperformed by over 40%. This brought valuations closer to fair value on a global level.
Growth is picking up, interest rates are lower and, as a result, in many market segments valuations are attractive.
From a global perspective, India continues to command a premium over developed and emerging markets. This premium reflects strong growth visibility and improved capital efficiency of Indian companies.
Q) Which sectors are likely to be in the spotlight in FY27 after the recent fall?
A) In the current environment, investors should avoid crowded deals and instead focus on sectors offering earnings visibility as well as reasonable valuations. Domestic cyclical sectors such as capital goods, manufacturing and infrastructure are well-positioned to benefit from the ongoing investment cycle in India.
Financial sectors, including banks and some NBFCs, are expected to continue to benefit from continued support from credit growth and overall economic momentum.
Within consumption, opportunities exist but are selective in nature, with a preference for segments where demand visibility remains strong. Computer science might monopolize attention, but due to concerns about the US economy and developments in AI.
(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
