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“The recent market correction has certainly brought valuations closer to historical averages, and this could suggest we are entering a fair value zone,” says Aditya Sood, Fund Manager, InCred Asset Management.In an interview with ETMarkets, Sood said: “Despite valuations normalizing, markets rarely bottom out just because valuations look fair. There are still macro risks that could lead to further downside, and we are not in a deeply undervalued zone yet,” 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? The Indian stock market experienced a significant downturn in February 2025. This decline has brought the index down approximately 16% from its September 2024 peak.
Several factors have contributed to this market weakness:1) Earnings Growth Challenges: We started the year with 12-14 percent earnings growth expectations, earnings growth for FY25 is going to be 5-6%.2) Foreign Investor Outflows: Since September, foreign investors have sold approximately $25 billion worth of Indian equities, driven by concerns over weak earnings, global economic uncertainties, and potential U.S.
tariffs.3) Global Trade Tensions: Announcements of impending U.S.
tariffs on imports from Canada, Mexico, and China have heightened fears of a global trade war, further pressuring markets.We are in earnings reset environment FY25 has been marred by tepid earnings growth after 4 years of 25 percent earnings growth on a low covid base. Are we now in a fair value zone after the recent fall seen in markets, or are there chances of further decline? The recent market correction has certainly brought valuations closer to historical averages, and this could suggest we are entering a fair value zone.
• The Nifty 50’s P/E ratio has now dropped to 20x earnings, which is in line with long-term historical 10-year average. Before the correction, it was at 24x, which was slightly overvalued zone.• The market cap-to-GDP ratio is around 100%, which is neither too expensive nor too cheap—indicating fair value.
• The price-to-book (P/B) ratio is also moving towards its long-term average of 3.2x.However, despite valuations normalizing, markets rarely bottom out just because valuations look fair.
There are still macro risks that could lead to further downside, and we are not in a deeply undervalued zone yet.Small & Midcaps are already in a bear market – how should one play this theme in 2025? Amid the ebb and flow of market dynamics, we believe that one segment emerges with an exceptional promise, the small and midcap stocks.These segments, often seen as the engine for excess returns, present attractive investment opportunities during bear markets.
We have the ability to identify themes early for our investors. Many of our investee companies, though small, are market leaders or challengers in niche industries with substantial growth potential. We focus on identifying high-quality businesses with sustainable competitive advantages and scalable business models.
The key is to focus on companies with high earnings growth potential, reasonable valuation and identify price to value gaps. 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? The sharp FII outflows can largely be attributed to a combination of global and domestic factors. On the global front, higher U.
S. bond yields, a stronger dollar, and persistent geopolitical uncertainties have made emerging markets, including India, less attractive.FII ownership of the Indian market is at a 10-year low.
A combination of a weaker dollar, low crude oil price and softening of US 10-year yield ~ down by 50 basis points in last two-week augers well for emerging markets.Global emerging market investing is a call on geopolitical stability, currency and relative attractiveness of India as a emerging market. I am sure you must be getting a lot of queries.
What are you telling your clients at this point in time?Investing is easy in the hindsight, what we ended up doing for our investors was to prematurely close one of our closed ended AIFs at 23 percent IRR over past 5 years in July 20242) We started to slow down our decision making process in terms of adding new ideas rejecting IPOs and refraining from participating in QIPs3) Positioned ourselves in areas where the risk of earnings downgrade was minimal predominately Healthcare and IT and underweight Financials and Auto. Bull market corrections are sharp and treacherous, maximum money is also lost in a bull market as investors are allocated the most to equities in a bull market.Investors should think about reward and not about risk, risk has probably played out in the portfolio, after a correction there is no point in becoming risk averse.
Irrespective of the style that you follow as an investor value – subsets being deep value - buying companies at replacement cost, hunting for companies at attractive dividend yield, low P/E on a trailing basis or buying growth companies at reasonable price. Today you can position your portfolio.Risk to reward is asymmetrical in a few companies.
A combination of earnings closer to bottoming out, multiples bottoming out and promoter and insiders buying is a powerful combination to back.Key questions that we are asking ourselves is how a risk is to reward at the current juncture, what is the IRR that the stocks that you own will deliver in 3-5 years. 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 new normal?A) It depends on multiple factors; we could see earnings pressure for at least another quarter before a meaningful recovery. If trade war concerns escalate further, recovery could take longer.
However, if there’s a resolution or softening of tensions, we may see a turnaround in late 2025.If central banks, particularly the U.S.
Federal Reserve and RBI, begin cutting interest rates in the second half of 2025, liquidity conditions will improve, potentially boosting corporate earnings.We believe earnings growth would mean revert to 10-12 percent in line with the nominal GDP growth, FY26 would be materially better in terms of earnings growth. What is causing fall in the rupee against the USD? Yes, growth has taken a hit, but I hope it is not all domestic factors.
The fall in the rupee is not solely due to domestic issues. It’s a combination of global macroeconomic pressures, external trade imbalances, and some India-specific factors. The US dollar has strengthened vis-à-vis the developed world currencies i.
e Yen, Euro, GBP and the CHF also relative to the EM currencies. The US dollar has been on a strong uptrend due to higher-for-longer interest rates in the US, making it more attractive to global investors.As a result, emerging market currencies—including the rupee—have depreciated.
Foreign Institutional Investors (FIIs) have pulled out over ₹1.1 lakh crore from Indian equities in the first two months of 2025. This large-scale selling exerts downward pressure on the rupee.
Which sectors should one consider deploying cash in 2025? There are a few structural themes that remain intact. The financialization of savings, fuelled by digital advancements and government incentives, is directing household wealth into productive investments.The financial sector, specifically select large cap banks are favoured at this juncture.
Also, domestic consumption-driven sectors, like certain segments of FMCG and retail, may benefit as inflation moderates and rural demand picks up.The rapid expansion of quick commerce, enabled by mobile internet and e-commerce growth, is revolutionizing retail, with the market expected to reach $5.5 billion by 2025.
Meanwhile, the Make in India initiative, backed by policy reforms like the PLI scheme and the China+1 strategy, is strengthening India's position as a global manufacturing hub.Additionally, automation is enhancing efficiency across industries, driving innovation and economic expansion. These high-growth sectors present compelling opportunities for capital deployment.
Which sector(s) should one consider pairing stake or positions? We would avoid narrative driven investing in sectors like EMS, renewables, defense etc. wherein valuations were lofty and were categorised as sunrise sectors.The narrative led to over-ownership in these sectors.
Valuations are still lofty after a meaningful decline 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? The post-COVID bull market was one of the strongest rallies in history, largely driven by excess liquidity and easy monetary policy coupled with fiscal spending.Now, we are in a different phase—higher interest rates, global uncertainties, and stretched valuations in certain pockets have led to a correction.
For first-time investors, this phase might feel unsettling, but corrections are a part and parcel of a market. Instead of panicking, focusing on your financial goals and practising asset allocation – by increasing allocation to equities post corrective phase as markets bottom out would serve investors well in the medium term.(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own.
These do not represent the views of the Economic Times).
