Expert View: FII Selling Makes Indian Market Valuations Reasonable, Quality Stocks Advised
Dharmesh Kakkad, Senior Fund Manager at ICICI Prudential AMC, has provided insights into the current Indian stock market environment. He stated that Foreign Institutional Investor (FII) selling has led to valuations becoming reasonable, though they are not yet cheap. In the face of ongoing market volatility, Kakkad suggests investors adopt an investing style focused on quality stocks, as these tend to perform well during turbulent times.
Assessing Earnings Visibility and Valuations
Kakkad believes the earnings downgrade cycle is likely nearing its end. With meaningful monetary easing from the RBI and fiscal support from the government, the broader macro environment appears supportive for a growth recovery. This, in turn, should eventually lead to an earnings revival. From a valuation perspective, the market has experienced underperformance due to high starting valuations and a limited margin of safety, resulting in muted returns over the past year. Consequently, valuations have become reasonable but not cheap.
Managing Return Expectations Amid Consolidation
Historical data indicates that when valuations are high and the margin of safety is limited, returns tend to be subdued. During such phases, patience is critical. Investors who remain invested through this period often achieve reasonable outcomes over longer durations. It is essential for investors not to anchor their expectations on past periods of strong market performance.
Ideal Portfolio Amid Geopolitical Risks
Adhering to asset allocation is the optimal approach to navigate volatile times. Within equity allocation, products with flexible mandates that can invest across market capitalizations, themes, and sectors should be considered. Given the steep rally in precious metals, any incremental allocation to them can be made through multi-asset offerings rather than standalone exposure.
Best Risk-Reward Opportunities in Indian Equity Market
Since markets are not cheap, risk-reward opportunities are being evaluated through a relative-value lens. Focus should be on sectors where expectations are muted, ownership is low, and valuations offer a reasonable margin of safety. Key sectors include:
- Technology: This sector stands out due to extreme pessimism, low implied growth assumptions, strong balance sheets, high cash generation, and improving deal momentum.
- FMCG: Signs of recovery in volume growth, reasonable valuations relative to history, and low ownership make this sector attractive.
- Pharmaceuticals: Offers a strong growth runway across domestic and export markets, supported by R&D investments, specialty portfolios, and structural growth drivers.
- Oil & Gas: Presents value due to attractive valuations, under-ownership, and margin of safety in both upstream and marketing companies.
- Life Insurance and Select Large Private-Sector Banks: Appear attractive with reasonable valuations, strong balance sheets, and potential benefits from economic recovery.
Strategies Behind ICICI Prudential Value Fund's Success
The ICICI Prudential Value Fund has consistently led in its category by adhering to a disciplined relative-value framework, effective sector allocation, and the willingness to rotate capital when better risk-reward opportunities emerge. The fund also reduces exposure when optimism becomes excessive in certain pockets. This approach acknowledges that underperformance is inevitable in some market phases, but over time, sticking to valuation discipline and margin of safety has delivered encouraging outcomes.
Investment Philosophy Amid High Volatility
A quality or blend of quality and value investment style generally performs well during heightened volatility. Quality companies, characterized by strong balance sheets and earnings, remain resilient even in volatile phases. Value strategies tend to recover quickly during economic recoveries.
Sustained DII Buying Amid FII Selling Pressure
Currently, domestic inflows remain strong, though the longevity of this trend is uncertain. From a macro perspective, India is well-positioned, with the government taking various measures to fuel economic growth. Due to continuous FII selling, valuations have become much more reasonable. Given this combination of strong macros and reasonable valuation, there is little reason for concern at this time.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions.
