Cut small-cap exposure, stay selective in midcaps: Anand Rathi's Gaurh

Valuation comfort is the greatest in large-caps and select midcaps right now, while small-caps deserve caution, said Neeraj Gaurh, director at Anand Rathi Share and Stock Brokers

The real risk for the markets isn't the geopolitical tension itself, but whether it pushes crude sustainably above $90, which would feed into inflation and keep global bond yields elevated, said Neeraj Gaurh, director at Anand Rathi Share and Stock Brokers in an email interview with Ananya Chaudhuri. Edited excerpts: 

What's your market outlook for FY27, given clear uncertainty about an end to US-Iran tension?

 

The US-Iran uncertainty doesn't change the underlying thesis; this remains an earnings-led market, not a liquidity or sentiment-led one. Geopolitical flare-ups in West Asia matter less for direction and more for the transmission channel: as long as crude holds broadly in the $80-90 band, markets have learned to look through the headline risk rather than re-price every escalation. The real risk isn't the tension itself but whether it pushes crude sustainably above $90, which would feed into inflation and keep global bond yields elevated; that's what would actually threaten the double-digit, earnings-tracking return path for financial year (FY27). Absent that, the outlook stays intact: nominal GDP normalising toward 10-10.5 per cent, and index returns compounding with earnings rather than re-rating.

 

Where do you see valuation comfort for FY27? Should investors rotate out of SMIDs to large-caps?

Comfort is greatest in large-caps and select midcaps right now. Valuations in banks remain reasonable rather than stretched, and the credit cycle is just turning up; that's where earnings visibility is highest. Smallcaps deserve caution, not because the theme is wrong, but because they amplify both the upgrade cycle and any de-rating from a yield shock. A full-scale SMID-to-largecap rotation isn't necessary, but trimming small-cap exposure and staying selective in midcaps makes sense until the foreign institutional investors (FII)-reallocation and rupee-stability questions are further resolved.

 

Indian IT shares outperformed intermittently during the global selloff in chip stocks. Do you think the AI-reverse trade has started benefiting this space?

 

The intermittent outperformance during the chip-stock selloff looks more like a relief bounce than the start of a genuine reverse-trade into Indian IT. Valuations, even post-correction, around 14-15 times forward, still carry a premium to global peers like Accenture. The structural question (can the $1.3 trillion outsourcing market outgrow the $250-300 billion of AI-driven deflation) isn't resolved yet, so it's too early to read this as a durable AI-reverse-trade tailwind. Stay selective.

 

How soon do you expect FIIs to come back to India? Do you expect the pace of flows of DIIs to slow as markets remain range-bound?

 

FII return should stay tactical rather than strategic until two conditions are met: a genuinely stable rupee, and a global "tech reset" that rotates capital out of US AI infrastructure names into Asia broadly, not just Korea or Japan. Until then, expect FII flows to stay choppy rather than a sustained re-commitment. DII flows are unlikely to slow meaningfully even if the market stays range-bound; domestic flows have been the primary engine for two years, and that structural SIP-led demand doesn't turn off with short-term index consolidation.

 

What's your view on the pharma sector as it reversed its gains after the US tariff announcement? Other overweight and underweight sectors?

 

The pharma pullback post-tariff announcement is a headline-driven reaction rather than a change in fundamentals; it's worth watching but doesn't yet warrant a structural underweight. Overweight sectors remain private banks, industrials or capital goods, and discretionary consumption. Underweights stay real estate and the broad IT basket.

 

How has the Q1-FY27 earnings season played out thus far according to you? Do you expect more earnings downgrades in the quarters ahead amid geopolitical developments?

 

Early trends confirm the pre-season expectation — upgrades concentrated in financials and industrials/capital goods, while IT services, airlines, general insurance, and parts of oil and gas and oil marketing companies (OMCs) carry downgrade risk. More downgrades are likely in the quarters ahead if geopolitical developments keep crude elevated.  =======  Disclaimer: View and outlook shared belong to the respective brokerages/analysts and are not endorsed by Business Standard. Readers' discretion is advised.