‘Complacency poses greatest market risk now ‘‘

Equity markets could remain choppy in the lead-up and during the General Elections. The geopolitical landscape is also quite volatile, which could add to the uncertainty. Markets have priced in almost every positive, increasing volatility at every possible negative news. Bond yields have been inching upwards in response to an increase in US Treasury yields as well as a rise in crude oil prices. We expect the 10-year benchmark G-Sec yield to find some anchor at 7.3 per cent levels. Also, the FPI buying could continue to be a strong catalyst to cushion any sharp uptick in bond yields.

The market has discounted almost every positive news, including favourable electoral outcomes. Complacency risk is the biggest risk in the market as of now. Given the linear upward movement in prices across almost all segments, investors, especially those new to the investment world, have hardly seen a negative spell in the markets for long. 

Markets look fairly valued at the current juncture and could sustain momentum, provided no material negative surprises on the earnings front.

Given that the BFSI sector has relatively underperformed, there could be select opportunities in the space. We also like the pharmaceutical and healthcare sectors. Tactically, commodities look good, and opportunities are selective in the real estate space. Market cycles are shortening and the next leg could be more bottom-up driven rather than a top-down approach.

Earnings could be the key trigger for future movements in stocks or sectors. Until we see some stability, there could still be some downside in the IT sector.

The corporate sector in India saw reasonable deleveraging of balance sheets during the Covid phase. We have definitely seen a very good pick-up in the capex cycle, and the impact of that has manifested in equities. While we are still not in a capex boom, it looks like, on a trajectory basis, we are headed there.

While we have been cautious on the market lately, we have been selectively looking at investment opportunities. Given the spectacular performance in the mid- and small-cap segment, we have consciously gravitated towards large-caps over mid-caps. We continue to remain invested with some tweaks to the portfolio and build some defence mechanisms in case of a knee-jerk reaction in the markets.

Geopolitics will remain at the forefront as it directly affects crude oil prices, several other commodities, and currency. Markets may continue to be conscious of the current fluid situation in the near term. If the geopolitical situation aggravates, it may adversely impact commodity prices, specifically oil. Oil is a crucial import item for India, and hence, it may have the potential to stoke inflation. 

Markets will have to wait for rate cuts as the US is not in any hurry to ease rates. India, too, may not want to relent despite relatively better inflation, as it could impact the rupee. This could mean continued elevated cost of borrowing, and hence, interest rates sensitive as a sector may not perform. Rate cuts are not completely off the table. However, the quantum of this will be a function of when the US does the first rate cut. Fed fund futures currently are indicating not more than one rate cut. Similar could be the case for India as uncertainty on geopolitics prevails. 

The valuation gap between large-cap and mid-cap has significantly narrowed. Hence, it is prudent to be cautious at current levels. Opportunities in this segment are more bottom-up stock specific in nature than owning a sector in general.

Given the huge divergence in valuations between India and China on offer basis the forward PE, there could be some allocation adjustments. However, the situation in China is not completely clear yet. Hence, the current valuations could extend longer.