How do you see the domestic market right now? Do you think the risks from the US–Iran conflict are fully reflected?
Indian equity markets have undergone nearly two years of correction. Nifty valuations are down 10–15 per cent from their September 2024 highs. The correction has been sharper in mid and smallcap stocks, with companies below ₹10,000 crore in market capitalisation seeing sizeable declines, driven by tariffs and the US–Iran conflict.
The duration of the crisis is a key determinant of market behaviour. Elevated energy costs affect both domestic and global growth, and a prolonged crisis could materially impact earnings.
Markets appear to be pricing in an early resolution. Any disappointment could weigh on earnings and markets. Hence, a systematic approach with appropriate asset allocation remains important, given geopolitical uncertainty.
What changes have you made to your portfolio since the conflict began? Are you holding more cash?
We have increased our largecap holdings over the past two years, making our portfolios more resilient to macro challenges. We have also focused on not overpaying for growth by keeping a close eye on valuations. This has helped reduce risks.
Given the shift in markets, the relative attractiveness of sectors such as private-sector financials, pharmaceutical, select information technology (IT) services, and utilities has improved on a risk-adjusted basis. Our focus has been on adding to these sectors.
From a cash perspective, we prefer a well-diversified portfolio rather than holding large amounts of cash for market timing, as consistently getting that right is difficult and can derail investor objectives.
How big a concern are elevated oil prices at this point? Which sectors are likely to be hit the most?
High oil prices are a major concern if they remain elevated for an extended period. Current price levels, if sustained, could significantly impact the growth outlook both locally and globally.
A broad range of sectors could be affected, as interest rates, currency movements, and inflationary trends may become volatile. A swift resolution to the crisis is therefore important for equity market recovery.
How much of a concern are flows right now, with continued foreign portfolio investor (FPI) selling and some signs of moderation in domestic inflows?
FPI selling has accelerated in recent weeks as the US–Iran conflict has reduced risk appetite. Domestic flows, however, have remained steady, particularly systematic investment plan (SIP) inflows into mutual funds.
The ongoing selloff is creating opportunities for investors with a three- to five-year horizon.
Financial stocks have seen sharp cuts this month. Do you think the correction is overdone, considering that valuations were already reasonable?
Financials have historically seen high FPI ownership, so any selling by them tends to put pressure on the sector. In addition, inflation risks from a prolonged energy crisis remain a concern.
However, a considerable part of the valuation correction has already taken place. Unless the conflict leads to an extended energy crisis, valuations are becoming attractive.
What is your view on other key sectors, especially IT, in the current environment?
The IT sector is undergoing a derating, driven by concerns around the long-term impact of artificial intelligence (AI) on growth sustainability. Current valuations already factor in a meaningful slowdown in growth and lower terminal multiples.
Strong cash generation and currency tailwinds remain positives. Any improvement in growth expectations could act as a trigger. Leading companies are trading at earnings yields of over 5 per cent.
What would you advise investors to do at this stage — take a staggered approach or wait for the conflict to ease?
Bad news often leads to better prices. A staggered approach is a sensible way to participate in equity markets, as it allows investors to capture better entry valuations over time.
Increasing SIP allocations with a five-year-plus horizon is a practical strategy in the current environment.
Why has India underperformed other large global peers during the ongoing crisis?
India entered this phase with elevated valuations, trading at nearly an 80 per cent premium to emerging market indices — well above long-term averages. That premium has now eased to 40–45 per cent, closer to historical norms.
Weak earnings growth and limited direct benefits from the AI-led investment cycle — where markets such as South Korea, Taiwan, China, and the US are better positioned — have also been major drawbacks to Indian equities over the past two years.
 "Sailesh Raj Bhan, President and CIO – Equity Investments, Nippon India Mutual Fund")