Another 10-15% correction in mid, smallcaps is possible: Siddharth Vora

Stock Market Today: The Indian stock markets will remain range-bound in 2025 with a mild positive bias towards large-caps

Indian stock markets have dipped sharply from their October 2024 highs as foreign investors dumped Indian equities amid high valuations and other global developments. SIDDHARTH VORA, head of quant investment strategy & fund manager at PL Asset Management, tells Nikita Vashisht in an email interview that they have transitioned from a 'buy on dips' to 'sell on a rise' market strategy. Edited excerpts:

 

How do you see the markets playing out in the rest of 2025?

The Indian stock markets will remain range-bound in 2025 with a mild positive bias towards large-caps that offer valuation comfort after the recent correction. The markets are stuck between domestic demand revival and global headwinds. In the Indian context, inflation has moderated (declined from 10.9 per cent in October 2024 to 4.31 per cent in January 2025), the Reserve Bank of India (RBI) has infused liquidity in the system by cutting interest rates by 25 basis point and Open Market Operations, and the Government has announced income tax relief.  TRACK STOCK MARKET LIVE UPDATES HERE

 

 

Globally, however, US President Donald Trump's tariff announcements and fears of global trade disruptions have added uncertainty to the global economic outlook. Additionally, tensions among major global economies could keep foreign investors cautious about increasing their exposure to emerging markets like India.

 

Have you started nibbling in stocks/sectors recently? What's on your radar?

Yes, we have selectively increased our positions in high-quality private lenders, consumer durables, discretionary, and hospitals. Over the past seven months, our proprietary quant models have been suggesting a tilt towards quality and low-volatility investing style. So, an exposure to these sectors contributes to a lower portfolio beta and helps manage the rising volatility. The portfolio has around 50 per cent allocation towards largecaps, 30 per cent towards midcaps, and 20 per cent towards smallcaps.

 

Private lenders, Agrochemicals, Fertilisers, and Chemicals  -- sectors that were absent from our portfolio over the last 18 months, have now come back in our portfolio over the last two months as valuations have become comfortable in high quality franchises.

 

When do you expect corporate earnings to support market recovery?

We are starting to see early signs of a corporate earnings recovery, and several key factors are aligning to support a more substantial rebound. Economic measures like additional RBI rate cuts, liquidity infusions, and budgetary tax reductions are expected to provide a significant boost to earnings growth in the coming months. Recent economic data also reflects resilience in the economy. 

 

Do you think market valuations are lucrative enough to lure FIIs back to the Indian markets?

Currently, the Nifty 50 is trading below its long-term averages, making large-cap stocks more attractively priced and providing a solid margin of safety for investors. As of January end, the Nifty 50 index, with a trailing P/E of 21.81x, was slightly below its three-year average of 22.75x.

 

FII outflows could be bottoming out given the weakening of the US Dollar index, stable crude oil price, falling US bond yields, valuation comfort, and liquidity support by the RBI. In this context, there seems to be limited room for price correction in large-caps, where FIIs are heavily invested, going forward.

 

In contrast, MidCap and SmallCap indices still trade a 20-per cent premium compared to their historic cycles. Though, they are down from a peak of 40-per cent premium earlier. So, another 10-15 per cent correction in mid and smallcaps cannot be ruled out in the near-term.

 

What could be the best way to navigate through Donald Trump's tariff tactics?

Given the evolving and unpredictable nature of tariff policies, making definitive calls is challenging. We've seen the Trump administration impose tariffs, followed by retaliatory actions, only for these measures to be quickly postponed. This unpredictability means that no one can be certain of what may happen tomorrow. The best approach is to strike a balance between domestic-focused sectors and export-oriented industries, remaining agile and ready to adjust allocations based on policy clarity. Focus on sectors offering strong valuation comfort, clear growth visibility, and resilience to global disruptions. 

 

Do you think defensive sectors like Pharma and fast moving consumer goods (FMCG) can provide cover to investors right now?

The market structure has undergone a significant shift over the last 10 months. Earlier, we were in a 'buy on dip' market, where bad news was often overlooked and markets continued to rise. However, we have now transitioned to a 'sell on rise' market, where even good news is being ignored, and the sentiment remains weak.

 

While bulk of the bad news, whether related to growth, macro or valuations, seems to be priced in, exposure to low-volatility, low-beta sectors can help navigate volatility and reduce drawdowns. Having some exposure to defensive sectors like information technology (IT), healthcare, and consumer staples can be beneficial in protecting capital amid the current turbulence.