During bull markets, optimism often makes investors forget a simple truth: even great businesses can become poor investments if bought at the wrong price.
For Sailesh Raj Bhan, chief investment officer (equities) at Nippon Life AMC, that principle has guided his investing philosophy for nearly three decades.
As the Indian market recovers from the lows of April, Bhan sees a landscape that is becoming highly attractive. In a conversation with Mint, he highlights why the recent valuation correction offers a prime entry window, how external global trends like the AI trade created accidental bargains in Indian banking, and why an investor's respect for entry prices remains the ultimate defence against market volatility.
Markets have recovered from the April lows. Do you expect the rally to continue? What will drive markets from here?
Markets have faced headwinds for almost two years, dating back to the highs of September 2024, primarily because valuations had grown expensive. However, a combination of prolonged consolidation and aggressive selling by foreign portfolio investors (FPIs) has normalized valuations across several pockets of the market.
Simultaneously, corporate earnings growth, which remained muted over the last two years, began showing signs of recovery in the recent quarter. As we move past the immediate disruptions caused by geopolitical conflicts, we anticipate corporate earnings visibility to improve significantly over the next two quarters.
When a recovery in earnings coincides with normalized entry valuations, it creates an attractive environment for long-term equity participation. If global crude oil prices continue to stabilize around current levels, we could see surprisingly strong corporate earnings over the next 12 months.
Have these shifts changed your investment strategy?
While strategies must naturally adapt as market conditions evolve, our foundational framework remains consistent: do not overpay for growth. The core objective is to acquire sustainable growth businesses at sensible prices.
During the height of the market overvaluation over the past two years, we maintained a significant allocation to large-cap equities, where valuations were relatively insulated and offered better protection.
Over the last few months, however, price corrections have occurred across almost every category. This has allowed us to find value and participate more broadly across large-, mid- and small-cap segments.
When prices are hyper-inflated, the best approach is to remain widely diversified; when corrections occur, you concentrate capital into specific opportunities created by those market shifts.
What are some cues and cycles you keep a close eye on to adjust your portfolios?
The primary variable we track is the corporate earnings cycle. We constantly analyse whether a sector is operating at the extreme low of its earnings potential with an active recovery on the horizon.
When you identify a strong earnings recovery cycle in a sector that is deeply out of favour with the broader market, the asymmetric upside can be substantial. Often, these opportunities are triggered by external shifts rather than structural internal failures.
For example, over the last six to nine months, we witnessed intense selling by foreign institutional investors. Because foreign capital is concentrated heavily in large-cap private banks, they had to liquidate what they owned to fund the global AI trade elsewhere. This external flow pressure caused private banking valuations to fall significantly, creating a favourable risk-reward profile.
We saw a similar dynamic in the IT services sector, where valuations dropped sharply due to localized global headwinds, creating an ideal entry window.
How well positioned is India to handle fresh global shocks?
India's macroeconomic balance sheet is currently in its strongest position in years. We do not have a credit crisis; the domestic banking system has largely resolved its bad debt issues and is highly stabilized. Similarly, corporate and consumer balance sheets remain resilient.
Our primary systemic vulnerability historically has been energy costs. When crude oil prices spike abruptly to $100 or $110 per barrel in a matter of weeks, it strains our currency and impacts corporate margins.
We have already absorbed that volatile phase and consolidated successfully. Unless energy costs experience another extreme upward spiral, the domestic macro risks are well contained.
You actively manage large-cap, multi-cap, and pharma funds. What should investors expect from these strategies moving forward?
Each of these funds carries a distinct objective and a 20-year operational track record across multiple market cycles. The large-cap fund strategy maintains an 80% to 85% allocation to the top 100 benchmark companies. Given that large-cap valuations are highly reasonable today, this space offers significantly lower volatility and the potential for steady, earnings-led returns.
While the multi-cap fund balances roughly 45% in large caps with 55% across mid- and small-cap companies, capturing a broader spectrum of the top 500 enterprises. It relies on deep, bottom-up stock selection with long holding periods, in some cases, spanning 15 to 20 years, making it an ideal single-product solution for long-term investors seeking broad market participation.
Pharma fund is focused on a sector where India holds a definitive global manufacturing and scientific edge. Because thematic funds operate on unique cycles, we recommend this strategy exclusively for investors with a minimum five-year investment horizon.
What is an investment philosophy you have stuck to over your three decades in the market?
Absolute respect for valuations is the single most reliable tool for navigating market cycles. Markets will inevitably experience phases of pure euphoria where asset prices detach from reality. How you choose to behave during those euphoric phases dictates your investment performance for the subsequent three to five years.
Even the highest-quality business or asset class has a fundamental price ceiling. The secret to long-term success is avoiding extreme pessimism during market corrections, and refusing to get swept up in euphoria when prices peak.
For a moderate-risk investor with a long-term horizon, what does an ideal asset allocation framework look like today?
For an investor with a clear medium-term horizon of five years or more, a highly effective and balanced architecture consists of 60-65% in equities, 10% in gold, and the remaining 25-30% allocated to fixed income or debt.
Gold is not included to generate outsized, speculative returns, but it is positioned because its historically low correlation to equities provides a crucial safety net during equity market drawdowns.