Apart from some currency depreciation, the Indian economy has held up reasonably well, and growth numbers remain stable, said Sailesh Raj Bhan, president and chief investment officer (CIO) - Equity Investments, Nippon India Mutual Fund.
“India today is also far less fragile than before,” he added.
The broader belief is that elevated crude prices are not a permanent situation, as they would hurt the global economy as well. Once conditions normalize, flows are likely to return to India, said Bhan.
Among the sectors, he likes all private-sector banks, consumer plays, and general insurance plays.
Edited excerpts:
Q 1) In this recovery phase, should investors focus on sector selection or continue a systematic investment plan-led (SIP) accumulation?
Things will improve in India as investors begin to see opportunities emerge. Traditional businesses are also doing well as we come off a weak earnings cycle, while currency movements could provide a meaningful boost—earnings could expand by around 10% if current levels sustain for 12 months.
If crude prices ease over the next 6-12 months, the outlook could improve further; otherwise, investors may have to wait another year. For now, this remains an accumulation market. Investors should continue SIPs and, if comfortable, even increase allocations during periods of weakness to accumulate more over the long term.
Q 2) An FII (foreign institutional investor) recently said that apart from currency risk and capital gains tax, a key concern for FIIs in India is the higher disclosure requirements compared to other markets. What have you been hearing on that front?
Every market comes with its own operating challenges, and these issues in India have existed for years. Investors always weigh the trade-offs—despite concerns around disclosures or liquidity, the key question is whether India still offers the right opportunity at the right price.
These concerns are amplified when other markets, such as China or Korea, offer higher returns. If India were still in a strong rally, FIIs probably wouldn’t be focusing as much on these issues—after all, they were heavily overweight on India until a few years ago despite the same conditions.
Q 3) But how do you view the recent wave of downgrades from some of the large brokerages?
Downgrades and upgrades have always been part of the market and, in many ways, are just noise. Large investors don’t base allocation decisions solely on brokerage reports—they look at where opportunities are most attractive globally.
India today is also far less fragile than before. Apart from some currency depreciation, the economy has held up reasonably well, and growth numbers remain stable. The broader belief is that elevated crude prices are not a permanent situation, as they would hurt the global economy as well. Once conditions normalize, flows are likely to return to India.
Q 4) In your opinion, what is the biggest macro risk that investors are probably underestimating?
Oil remains the key macro risk for India, and markets may still be underestimating its impact if prices stay elevated for a prolonged period. The longer crude remains high, the bigger the challenge becomes for the trade balance, current account, inflation, and currency stability.
That said, some of this risk is already getting priced in, especially after nearly two years of flat-to-negative returns in parts of the market. But if oil prices spike sharply from here, it could become a much larger macro concern for India.
Q 5) Are you cautious about any themes?
You still have to be careful about valuations and mispricing because many stocks continue to price in very high expectations. Earlier, maybe 70–80% of stocks looked excessively valued; now that froth has come down to around 30–40% of the market, especially in small caps. The extreme valuations that were once widespread are no longer as common.
Q 6) FIIs have sold in nearly 80% of Nifty 50 stocks versus around 50% in the Nifty 500. Is that typically the case during corrections, where selling is concentrated more in large caps because liquidity is better there?
FIIs usually sell more in large caps during corrections because that’s where liquidity is highest. If they need to exit large positions quickly, it’s much easier to sell Nifty 50 or top-100 names than small and mid caps.
That’s why FII selling tends to be concentrated in heavyweight sectors like banks and large consumer names. In smaller stocks, liquidity is limited, so even if they want to sell aggressively, it’s not always practical. At the same time, when forced selling occurs across broader markets, small and mid caps can see much sharper price corrections.
Q 7) Do you like any particular sectors in India?
These are all private-sector banks, consumer plays, and insurance plays.
Q 8) In insurance, isn’t there a risk depending on the Strait of Hormuz situation?
Overall, it’s domestic-focused. We prefer the general insurance space.
Q 9) What about power, cables, and wires?
They look good.
Q 10) Return potential in that space?
The sector has potential, but cables are a bit expensive now. Some of today's profits may also come from inventory gains. There will be some adjustments as high-cost inventory gets replaced. Still, growth is reasonable, and under-penetration is there—the play is good, but it depends on what you pay. At 40x multiples, you must be careful; at 20–25x it’s acceptable.
Q 11) Real estate isn’t being talked about much now.
It’s already had a strong cycle. It’s cyclical, and you don’t see much beyond that unless a new growth phase comes in. Same with hotels and other cyclical sectors—people are not really talking about them right now.