Capex revival, US-Iran truce key to next market upmove

Capex revival, easing West Asia tensions and improving earnings could drive Indian markets towards fresh highs, says Bajaj Finserv AMC CIO

Despite lingering geopolitical risks, India’s macro fundamentals and earnings outlook remain robust, according to Nimesh Chandan, chief investment officer (CIO) at Bajaj Finserv AMC. In an email interview with Abhishek Kumar, Chandan says the outperformance of mid and smallcap stocks over largecaps is likely to continue, driven by superior earnings growth visibility. Edited excerpts:

 

Do markets fully reflect West Asia risks, especially if oil continues to stay elevated?

 

While spot oil prices remain firm, Brent crude futures are currently in backwardation, indicating that global financial markets expect a relatively swift resolution. Current communication from the conflicting parties also suggests that we are moving away from the storm rather than into it. Hence, our base case is a smooth resolution to the conflict, with crude oil prices declining.

 

While there are some earnings risks, these are not expected to be prolonged and are likely to be sector-specific rather than widespread. While input costs may rise intermittently – likely visible in the June quarter earnings – most Indian companies with strong business models should be able to manage cost headwinds through judicious pricing actions and operating leverage. Accordingly, we expect a healthy recovery in earnings growth in the subsequent quarters.

 

Apart from the easing of West Asia tensions, what key triggers will drive the next phase of market recovery?

 

Despite a confluence of global headwinds over the past 18 months, India’s macro fundamentals remain robust. Early green shoots of a private capex cycle are visible, while government capex remains healthy. A pickup in the capex cycle could lead to further earnings upgrades for capex-linked businesses and support broader economic activity.

 

Several government measures – such as goods and services tax (GST) reductions, income tax cuts, and the potential implementation of a pay commission in the near future — are already boosting consumption, and this trend is expected to strengthen further. Easing inflationary pressures should support earnings growth and help stabilise global and domestic bond yields, thereby improving risk perception for Indian equities.

 

The ongoing earnings season has also been healthy. Around 80 per cent of Nifty 500 companies have reported results so far, with double-digit growth in aggregate revenues (+13 per cent) and adjusted profit after tax (+32 per cent). We also expect the Indian rupee to stabilise with government intervention and easing of geopolitical tensions. Improving fundamentals should also bring foreign capital flows back into the country. Supported by these triggers and an expected resolution of the crisis, we expect markets to move towards all-time highs.

 

What sectoral shifts did you make in the wake of the US-Iran conflict?

 

We have undertaken only some tactical changes. Most notably, we have increased exposure to the commodities and energy value chains, as well as to high-quality export-oriented businesses.

 

Energy and commodity security have come into focus, driven by artificial intelligence-related capex – which requires a wide range of metals and minerals across the value chain — and supply chain disruptions stemming from the war. As supply chain challenges ease, we expect countries globally to build strategic inventories of critical commodities and minerals. Additionally, reconstruction of war-affected infrastructure in the region should boost demand for metals, thereby supporting prices. This is likely to benefit Indian metal and mining companies, particularly steel product manufacturers.

 

The recent depreciation of the Indian rupee also augurs well for high-quality export-oriented businesses such as pharmaceuticals and textiles. A sharp currency depreciation is akin to a meaningful tariff cut for these businesses, as it enhances their competitiveness within global supply chains. We expect Indian players to gain market share across these industries.

 

The mid and smallcap space has seen a sharper bounce back vis-a-vis larg cap stocks in recent weeks. Do you see the trend continuing?

 

We expect this trend to continue, as these companies offer better earnings growth visibility. Within this segment, smallcaps currently offer relatively better valuations and earnings growth prospects.

 

Concerns around information technology companies due to the artificial intelligence (AI) – related developments – most of which are largecap names – have weighed on largecap performance. In contrast, several smaller companies are beneficiaries of the power and capital goods value chains and are better positioned to gain from capex-led activity.

 

How do you assess the market valuation currently? Is it lucrative enough for foreign flows to return?

 

Currently, the Nifty 50 is trading at around 19–20x forward price-to-earnings multiples, broadly in line with its average valuation over the past 10 years. The valuation premium versus other emerging markets has also narrowed compared to historical levels following recent relative underperformance. As a result, we believe market valuations are reasonable.

 

This, combined with improving fundamentals and earnings growth visibility, should make India an attractive investment destination for foreign institutional investors once global risk appetite improves.

 

What would you advise investors to do staggered investment or wait for clarity on the conflict?

 

We recommend staggered investments (through systematic investment plan (SIP)/systematic transfer plan (STP) approach) rather than waiting for complete clarity to emerge. Geopolitical events are difficult to time, and markets tend to move ahead of their resolution. Gradual deployment helps manage volatility while ensuring participation in long-term growth. Investors should focus on disciplined asset allocation and avoid tactical timing decisions based solely on geopolitical developments.