Equities still attractive but entry costs rising - What investors should do

After a stellar five-year run that’s made India one of the world’s best-performing equity markets, investors may need to tread more carefully. According to WhiteOak Asset Management’s Market Perspective – October 2025, Indian equities remain fundamentally strong — backed by resilient earnings, healthy corporate balance sheets, and macroeconomic stability — but valuations have climbed above their long-term averages, suggesting a phase of “structural optimism amid tactical caution.”

 

The fund house says investors should stay invested in equities, but with sharper stock selection and realistic return expectations, as markets transition from valuation expansion to earnings-led growth.

 

“India’s long-term growth story remains intact, but with valuations running slightly above the historical mean, investors need to rely more on bottom-up stock picking than broad market participation,” WhiteOak AMC noted in its monthly outlook. 

BSE Sensex EPS Growth - Last 5 Years Trend (as on 30th September 2025)

 

 

BSE Sensex EPS Growth - Last 5 Years Trend (as on 30th September 2025)

   

Equities on a Roll, Earnings Momentum Intact

 

Over the last five years, the BSE Sensex has delivered a 16% compound annual growth rate (CAGR), closely tracking corporate earnings which have expanded at 16.6% CAGR between FY20 and FY25.

The average return on equity (ROE) for listed Indian firms stands around 15%, among the highest globally, supported by margin recovery, deleveraging, and strong domestic demand.

 

WhiteOak attributes this performance to “a virtuous cycle of macro stability, profitability recovery, and expanding retail participation.”

 

However, the Nifty 50’s one-year forward P/E multiple at 19.9x — compared to a 10-year average of 18.2x — indicates that valuations have entered the “moderately expensive” zone.  Small Cap Segment: Valuation Perspective Historical References 

 

Midcaps and Smallcaps Dominate the Rally

 

One striking trend highlighted in the report is the broadening of market participation.

The share of small- and mid-cap (SMID) companies in total market capitalisation has risen to around 40%, up from 30% five years ago, driven by retail and mutual fund inflows.

 

While this demonstrates market depth and confidence, WhiteOak warns that some smaller companies now trade at inflated valuations disconnected from fundamentals. 

The report advises investors to stay diversified across market caps, but focus on companies with strong earnings visibility, prudent leverage, and consistent governance standards.

 

Sector Winners and Laggards

 

Sectorally, the auto, PSU banking, and metals indices have led market gains in 2025, while IT and real estate have witnessed corrections from their earlier peaks. 

Sector winners

 

WhiteOak maintains a positive view on manufacturing, defence, and capital market-linked sectors, citing strong policy support and accelerating domestic capex.

 

Commodities and Gold Outperform Equities

 

Interestingly, while equities have consolidated, precious metals have delivered outsized returns in 2025.

Silver has surged 65% year-to-date (YTD), and gold is up 51%, fuelled by global uncertainty, central bank buying, and investor hedging against currency weakness.

 

The report suggests investors maintain 5–10% portfolio exposure to gold and silver, given their role as a hedge during market volatility.

 

Fixed Income: Yields Stable, Stay Short on Duration

 

On the fixed income front, the 10-year government bond yield remains stable around 6.6%, while the US 10-year Treasury trades near 4.2%, keeping the India–US yield spread close to 240 basis points.

 

WhiteOak expects yields to remain range-bound, supported by cooling inflation (~4.6%) and fiscal prudence. It advises investors to prefer short-duration or target-maturity strategies over long-duration bonds to mitigate mark-to-market risks.

 

“In the current environment, short-term bonds and high-quality credit strategies offer an attractive balance between yield and stability,” the report noted.

 

Macro Fundamentals: Growth Outpacing Peers

 

WhiteOak remains constructive on India’s macro outlook. The report projects GDP growth of 6.8% in FY26, with inflation under control and the fiscal deficit expected to stay near 5.1% of GDP.

 

Robust domestic consumption, infrastructure investment, and rising manufacturing exports underpin the medium-term growth trajectory.

 

India’s equity market capitalisation-to-GDP ratio now stands at 120%, reflecting both the market’s depth and investor optimism.

 

The rupee has held steady between ₹83 and ₹84 per US dollar, supported by a healthy current account and strong forex reserves.

 

Flows, Liquidity, and Participation

 

The report notes that foreign portfolio investors (FPIs) have turned cautious in recent months after strong inflows earlier in the year, while domestic institutional investors (DIIs) — including mutual funds and insurance companies — have continued to provide steady support.

 

Retail investors’ systematic investment plans (SIPs) continue to surge, with monthly inflows crossing ₹22,000 crore, reflecting strong domestic participation even in volatile phases.

 

Portfolio Strategy: Balance, Don’t Time

 

For retail investors, WhiteOak AMC recommends maintaining a balanced, diversified portfolio — with equities for long-term growth, fixed income for stability, and precious metals for insurance.

 

Recommended positioning for 2025–26:

 

Equity allocation: Continue SIPs, tilt toward quality large- and mid-caps.

 

Debt allocation: Prefer short-duration, high-grade funds or TMFs.

 

Commodities: 5–10% in gold/silver.

 

Global diversification: Small allocation to global or emerging market funds for currency and thematic exposure.

 

“Investors should focus on time in the market, not timing the market. The long-term India story is intact, but risk-adjusted positioning will matter more going forward,” WhiteOak concluded.

 

Key Highlights

 

Earnings strength continues: The BSE Sensex reported a 16.6% CAGR in earnings per share (EPS) over the past five years, with index levels also growing 16% annually. Corporate profitability remains strong, with an average return on equity (ROE) of around 15%.

 

Broader markets gaining share: Small- and mid-cap (SMID) stocks now account for nearly 40% of total market capitalisation, reflecting robust investor participation beyond large caps.

 

Valuations above long-term average: The Nifty’s 1-year forward P/E ratio stands at 19.9x, compared to its 10-year average of 18.2x. WhiteOak’s internal model suggests equity markets are moderately expensive, indicating a potential need for selective stock-picking rather than broad exposure.

 

Bond yields steady: The 10-year government bond yield is at 6.6%, broadly stable from last quarter, offering a reasonable alternative for balanced portfolios.

 

Commodities surge: Silver and gold have posted 65% and 51% gains, respectively, year-to-date, as investors hedge against global uncertainty and currency weakness.

   

Investor Takeaways

 

Stay equity-invested but selective—focus on quality businesses with sustainable earnings.

 

Diversify across market caps—mid and small caps remain part of the growth story but carry valuation risks.

 

Use systematic investment plans (SIPs) to manage volatility rather than timing the market.

 

Keep exposure to short-duration debt and gold for portfolio balance.