'Investors should remain selective, deploy funds in a staggered manner'

Utsav Verma of Choice Institutional Equities said that long-term investors should deploy funds in a staggered manner in sectors with stronger earnings visibility

The ongoing West Asia conflict can keep the markets volatile and foreign investors at bay. A sustained reversal in FII flows into India will largely depend on a recovery in corporate earnings growth to the tune of 15–18 per cent, a stable regulatory policy regime (multiple taxes imposed on investors, leading to subdued post-tax returns) and a stable currency, said Utsav Verma, head of research at Choice Institutional Equities. Edited excerpts:

How do you see the current market valuations? Has the risk-reward turned favourable for long-term investors?

The overall market has undergone both a time correction and a decline in headline indices over the past 18 months. Nifty 50 TTM P/E has declined from a high of 24.4x in September 2024 to 20.3x as of March 13, 2026, as compared to its 3-year, 5-year and 10-year average TTM P/E of 22.2x, 23x and 23x, respectively.

 

Although the current conflict opens downside risks, we believe that headline valuations appear lower than historical trends, and the risk-reward has turned favourable. We are of the view that long-term investors should deploy funds in a staggered manner in sectors with stronger earnings visibility.

Have mid and smallcap stocks corrected enough to look attractive?

Over FY25-26, the Nifty Smallcap 250 has witnessed a decline of 21 per cent from recent highs, whereas the Nifty Midcap 150 has slipped 12 per cent. In terms of valuation, Nifty Small Cap 250 TTM P/E has reduced from a high of 36x in December 2024 to 24.5x as of March 13, 2026, and Nifty Midcap 250 TTM P/E has reduced from a high of 46x in October 2024 to 30.1x as of March 13, 2026. Although the correction has been sharp from a valuation perspective, it was largely driven by elevated growth expectations, which had been priced into many companies. As the market reassessed the sustainability of these growth rates, midcap and smallcap stocks witnessed steep corrections. Investors are currently in a wait-and-watch mode, with institutional buying interest emerging selectively in sectors offering strong growth visibility and resilient earnings. 

How long do you believe the FII selling will continue, and what could trigger a reversal of flows?

FII net equity flows remained volatile during FY26, with positive inflows observed in the early part of the year and again in February 2026. Between April and June 2025, India witnessed FII inflows of Rs 387 billion, while February 2026 saw inflows of Rs 226 billion. However, on a cumulative basis, FII equity flows for FY26 (till March 13, 2026) recorded net outflows of Rs 1.2 trillion as compared to outflows of Rs 1.3 trillion in FY25.

Developed markets, such as the US, Europe, Japan, South Korea and Taiwan, currently offer several high-growth opportunities across sectors, including AI chip manufacturing, semiconductor design and fabrication, cloud computing, EV batteries, robotics, biotechnology and aerospace & defence. Many of these sectors have limited representation within India's markets. We believe that due to the availability of such high-growth opportunities globally, FIIs have multiple alternatives offering stronger earnings visibility and scale. A sustained reversal in FII flows into India will largely depend on a recovery in corporate earnings growth to the tune of 15–18 per cent, a stable regulatory policy regime (multiple taxes imposed on investors, leading to subdued post-tax returns) and a stable currency. 

Do you believe the ongoing crisis in West Asia could impact earnings in the near term?

The ongoing West Asia conflict reflects a classic Prisoner’s Dilemma dynamic. This dilemma can keep the markets volatile. In the given scenario, further downside cannot be ruled out, and caution is advised. The crisis can affect corporate earnings in the near term through elevated oil prices and energy costs. Prolonged elevated crude prices could weigh down on India’s macro parameters. In case the price of Brent remains at USD 130 per barrel for 3-4 months, CAD can go past 2 per cent, and the government's fiscal deficit may inch up by 15-20 bps to 4.45-4.5 per cent versus the target of 4.3 per cent. The overall credit growth may slow down to 11–12 per cent as compared to 14 per cent in FY27E. Sectors such as automobile, banking and financial services, basic materials, consumer discretionary and energy will be the most affected.

Which sectors look attractive from both a growth and a valuation perspective for the next fiscal year?

In our view, defence, IT, healthcare, pharmaceuticals and pure-play refiners among the downstream segment of oil and gas look attractive from both a growth and a valuation perspective, for the next fiscal year. Defence remains resilient to trade disruptions. Rising tensions support India’s growing defence export. Companies, such as Bharat Electronics, Bharat Dynamics, Data Patterns and Zen Technologies are well-positioned to benefit. Higher oil prices often weaken the INR, benefiting export-oriented IT and engineering research and development (ER&D) companies. One per cent depreciation can expand EBIT margins by 30-40 bps for such companies. Midcap players, such as Coforge, Persistent Systems, KPIT Technologies and Happiest Minds are better positioned in such a scenario.