The Indian equity markets have been grappling with volatility and uncertainty over the past several months. With multiple headwinds—ranging from slowing economic growth and tight domestic liquidity to relentless FII outflows and surging inflation—investors are understandably cautious. However, are there signs of recovery on the horizon? In an insightful conversation with Dipak Mondal of TNIE, Amisha Vora, chairperson and MD of Prabhudas Lilladher, shares her perspectives on the current market landscape. Edited excerpts:
The Indian equity market has been going through a tough phase lately. When do you see a recovery? Is there light at the end of the tunnel?
If you look back, India was one of the fastest-growing economies. However, over the last nine months, growth slowed down due to factors like multiple state and national elections, which led to lower government spending, particularly on capital expenditure. This impacted industries like capital goods, steel, and cement. Additionally, there was incessant selling by FIIs (Foreign Institutional Investors), and domestic liquidity became tight. Consumer price inflation also surged to 9-10% due to rising vegetable prices and duties on palm oil. This combination hurt corporate earnings, especially in the October-December quarter, leading to a de-rating of stocks.
However, things are changing. The RBI has started pumping liquidity into the system, and the government has increased capital expenditure and provided tax relief to boost consumption. Markets have already corrected significantly—large caps by 15-17% and small caps by over 20%. At this point, we believe large caps are fairly valued, trading around or below their 10-year average valuations. So, it’s a good time for investors to consider quality stocks.
Should investors stay away from mid and small-caps? What are the sectors investors should look at now?
Mid and small-caps where fundamentals don’t justify valuations are risky. Many of these companies have questionable management and poor balance sheets. If businesses don’t bounce back, their stock prices won’t either. Investors should review their portfolios and cut losses in poor-quality stocks, reallocating to quality businesses. We are recommending sectors like pharma, healthcare, hospitals, defense, and hotels, as they offer better growth visibility and are less impacted by global trade tensions.
Some large-cap stocks are now attractively valued. Does that mean the benchmark indices like Nifty and Sensex have limited downside from here? Could we see a relief rally soon?
I don’t foresee another 15% correction in the Nifty. A 3-5% dip over the next two months is possible, especially with the upcoming Trump-Modi discussions on tariffs, which could create some volatility. But a deeper correction of 10-15% has a low probability—maybe just 10%. Retail investors should focus on quality large-cap stocks with strong fundamentals and growth potential.
Investors should review their portfolios carefully. Stay invested in quality businesses with healthy cash flows, low debt, and strong return on equity. If you hold poor-quality stocks, switch to better ones. We recommend sectors like pharma, healthcare, defense, and hospitality. These sectors are less vulnerable to global uncertainties and offer good growth prospects.
Many experts suggest diversification across asset classes and geographies. Do you agree?
Diversification is essential, in both good and bad times. Gold is a good hedge against currency depreciation and global uncertainties. Fixed income provides stability when equity markets are volatile. Younger investors should have a higher allocation to equities to benefit from long-term compounding.
As for geographical diversification, India offers a wide variety of sectors, but for exposure to global themes like US and China technology, HNIs and ultra-HNIs can use their LRS limits or invest through mutual funds that have international allocations.
Retail investors often focus too much on mid-caps and small-caps. What should their ideal portfolio allocation be?
It depends on the investor’s risk profile, but given the current economic and market cycle, we recommend 60% in large-cap quality stocks, 25% in mid-cap quality stocks and 10-15% in small-caps. Quality and liquidity should be prioritized, especially in volatile times.
FIIs have been pulling out of Indian markets. Do you expect them to return soon?
FIIs moved away from emerging markets after the Trump administration’s strong dollar policies and tariff announcements. The US became an attractive destination with tax cuts and domestic growth support. But this can’t last forever. India’s strong demographic advantage, resilient balance sheets, and consumption-led growth make it an attractive long-term bet. Once valuations are attractive and growth picks up, FIIs will return.
You are bullish on India’s consumption story. What gives you that confidence?
Two key factors. First, the budget’s tax rebate will give around 80,000 rupees more in disposable income to about 1.5 crore working Indians. This will drive consumption in sectors like two-wheelers, appliances, and travel. Second, lower crude oil prices leave more money in consumers' pockets, which gets reallocated to other areas of consumption. Rural growth is also picking up. These factors together will support domestic consumption.
Some argue that higher capital gains taxes and double taxation are driving FIIs away. Do you agree?
Tax concerns are valid, especially the combination of capital gains tax and securities transaction tax (STT), as well as dividend distribution tax. This double taxation does burden investors. However, the primary reasons for FII outflows were high valuations and slowing growth. If those improve, taxes alone won’t keep investors away. That said, we continue to engage with the government on rationalizing these taxes.
Regulatory changes have affected retail participation in the markets, especially in F&O. Has this been detrimental?
Volumes have dropped, particularly in cash segments, due to reduced profits and stuck positions. F&O regulations were tightened, and while they reduced speculative trading, they likely prevented bigger losses for retail investors. Education and awareness are key in derivatives trading.
Some say retail investors should stop SIPs in mid-cap and small-cap funds. What’s your view?
They shouldn’t stop SIPs but should rebalance portfolios. Leave the asset allocation decision to professional fund managers who can better judge the market cycle and risks. Small-caps carry higher risks due to liquidity and management constraints, so investors should be cautious.
Private sector investments are not picking up despite incentives. Why is that?
Private sector capex in commodities like steel, aluminum, and cement is limited due to global slowdown and excess capacity. Infrastructure investment has shifted towards public funding after past issues with PPP models. However, areas like data centers, solar energy, and PLI-linked sectors are seeing investments, although their scale is smaller. Until broader consumption recovers, large-scale private capex will remain subdued.