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“Large-cap indices are nearing a zone where moderate equity allocation might be warranted, signalling a shift away from the conservative stance that high valuations previously dictated,” says Achin Goel, PMS Fund Manager at Bonanza Group.In an interview with ETMarkets, Goel said: “A further price correction of about 8–10% from early March 2025 levels, or sequential earnings growth reflected in EPS increases—or a combination of both—could bring large caps into fair value territory,” Edited excerpts:The month of February started on a volatile note with Budget 2025; since then, we have been on a losing streak. The index fell nearly 6% in February – the worst monthly decline since Covid 2020 rout.
What is your take on markets?Indian markets have been trading at historically expensive valuations, a trend we have highlighted in various publications, including DSP Netra.Valuations had stretched significantly beyond their long-term averages, with much of the optimism driven by expectations of a sustained 20%+ earnings CAGR.However, this paradigm has shifted as earnings growth has slowed, leading to a de-rating process that is gradually removing the froth from valuations.
Within the large-cap universe, parts of the market are already trading below their long-term averages.These segments now appear attractive when evaluated against their growth prospects and financial health. In contrast, many small- and mid-cap stocks remain overvalued and still need to correct further to reach fair valuation levels.
This de-rating phase represents a healthy recalibration for the market, aligning valuations more closely with fundamentals.While large caps are approaching zones of valuation comfort, small- and mid-caps continue to trade at elevated levels, requiring either price corrections or improved earnings growth to justify their current multiples.This divergence underscores the importance of selectivity and a disciplined approach to equity allocation in the current environment.
Are we now in a fair value zone after the recent fall seen in markets, or are there chances of further decline?The answer is nuanced: we are not quite there yet. The Nifty Index Price-to-Earnings (PE) ratio is now close to its long-term average, but this metric has been steadily rising over the years.Between 2003 and 2013, the Nifty Index trailing twelve months (TTM) PE ratio averaged 17x, whereas from 2014 to the present, it has averaged 22x—a notable 5-point re-rating upward.
A useful, albeit imperfect, way to assess fair valuation is by considering the aggregate Return on Equity (ROE) alongside earnings growth.Since the peak of September 2024, the Nifty Index PE has declined by 20%, with an even sharper decline seen in the Nifty 500. However, at an ROE of 15% and earnings growth of 14.
5%, the Nifty 500 PE still appears elevated.Earnings growth for the broader market is also decelerating. If earnings growth moderates to a range of 10–12%, a fair valuation for the market would likely be achieved at a PE multiple of around 17x–17.
5x.While the Nifty Index is approaching this range, the Nifty 500 remains some distance away. Once valuations reach these levels, their influence on equity allocation decisions will diminish.
Large-cap indices are nearing a zone where moderate equity allocation might be warranted, signalling a shift away from the conservative stance that high valuations previously dictated.A further price correction of about 8–10% from early March 2025 levels, or sequential earnings growth reflected in EPS increases—or a combination of both—could bring large caps into fair value territory.For the broader market, however, valuation comfort remains elusive but is gradually improving.
In calendar year 2025 (CY25), the Nifty Index EPS is projected to reach ₹1,150. When this materializes is uncertain, but at trailing PE multiples of 17x–17.5x (equivalent to index levels of approximately 19,500–20,200), valuations will offer limited insights for allocation decisions.
At that point, moderate equity allocation to large caps would be prudent within this valuation range. It’s important to note that no single method can perfectly determine fair value; instead, investors should rely on a combination of metrics and judgment to guide their decisions.Small & Midcaps are already in a bear market – how should one play this theme in 2025? With a 15% to 20% fall in indices, depending on which broad index you select, valuations have begun to normalize.
At the extreme, back in Sep’24 (easily identifiable in hindsight now) less than 1 in 4 stocks were trading below 3x price to book within the Nifty Mid Small 400 Index universe, a rare occurrence in Indian equity markets.This number has now increased to about 33%, or 1 in 3 stocks now have a price to book of below 3x. A healthy condition is to have a universe with at least half the stocks below 3x price to book when the aggregate ROEs are close to 15%.
We are still some distance from it. A combination of softer prices and rising earnings may help align valuations to the long-term history. The ideal way to participate remains to use the SIP route.
FII exodus continues in February. They have pulled out more than Rs1.1 lakh cr from Indian equity markets (net investment) in the first 2 months of 2025, NSDL data showed.
Where do you see the trend moving in the next few months?I have no idea when or why FIIs buy or sell. The key consideration is that when valuations are attractive informed investors would flock to Indian equities, whether they are foreign or Indian institutions.As of now, India’s premium over emerging markets is back to its long-term average.
Once valuations also reach that point, it would give a higher margin of safety to investors.I am sure you must be getting a lot of queries. What are you telling your clients at this point in time.
Investors navigating the current market landscape can consider some strategic adjustments to optimize their portfolios.Firstly, it may be prudent to transition from a conservative stance to a moderate one, recognizing that the time for aggressive investment strategies has not yet arrived. To incrementally increase equity exposure, investors can employ hybrid strategies such as Dynamic Asset Allocation or Multi Asset Allocation funds, which automatically raise equity weights during periods of lower valuations.
Additionally, topping up Systematic Investment Plans (SIPs) can be an effective way to gradually build equity positions. For staggered purchases and equity allocation, focusing on large-cap stocks is advisable.The BFSI sector, particularly private banks also present opportunities for strategic additions.
However, it is advisable to avoid aggressive allocations to small and mid-cap stocks at this juncture.Instead, utilizing SIPs and Systematic Transfer Plans (STPs) can help manage risk while still benefiting from potential growth in these segments.Earnings have not been great for India Inc.
and trade war fears are slowly becoming a reality. Are we ready for another weak quarter(s) of earnings growth? How much time will it take for things to adjust to the new normal?Nominal growth remains subdued, staying below the 10% mark. Export growth and top-line expansion in key sectors like IT and healthcare are also confined to single digits.
Given these conditions, anticipating high double-digit growth seems overly optimistic. Instead, a more realistic scenario involves a few quarters of earnings consolidation, followed by a potential revival.The BFSI sector is poised to be an early leader in the next earnings cycle, potentially driving growth as the market stabilizes.
What is causing the fall in the rupee against the USD? Yes, growth has taken a hit, but I hope it is not all domestic factors.India's balance of payments remains delicate, with improvements largely driven by portfolio flows in the debt segment. The country's merchandise exports continue to lag behind imports, resulting in a significant trade deficit.
However, the boost from exports to the Gulf Cooperation Council (GCC) countries and the robust performance of services exports have helped stabilize the balance of payments to some extent.Despite these efforts, the balance of payments remains vulnerable to fluctuations in foreign investment flows. Over the past two financial years, combined Foreign Portfolio Investments (FPIs) in India have been below $25 billion cumulatively—a multi-decade low.
This reduced inflow, coupled with Foreign Institutional Investor (FII) equity outflows, has negatively impacted the Indian Rupee. There is still room for further adjustments in the Rupee in response to the dynamics of India's balance of payments.Which sectors should one consider deploying cash in 2025?When considering where to deploy cash in 2025, some sectors offer opportunities.
Private banks are a strong contender, given their robust financial health and growth prospects.Additionally, select segments of the healthcare sector offer potential for investment, particularly those with strong fundamentals and competitive advantages.For cyclical sectors, such as metals, it's advisable to wait for attractive valuations before investing.
Companies with solid balance sheets are preferable, as they are better positioned to weather market fluctuations and capitalize on future growth opportunities.Timing is crucial, so investors should remain vigilant for entry points that align with their risk tolerance and investment goals.Which sector(s) should one consider pairing stake or positions?Valuations in IT and man industries are still readjusting to the trend of slowing earnings.
Investors need to be careful while selecting stocks in these sectors.What is the best strategy to play the market, especially the first-time investor who might be seeing their portfolio in the red probably for the first time since COVID?For new investors looking to enter the market, hybrid funds like multi-asset allocation, dynamic asset allocation, or aggressive hybrid funds can be a great way to begin investing. Another excellent approach is to start a SIP and maintain regular contributions without interruption.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times).
