In this interaction, he explains why caution is still warranted in the small-cap space, identifies sectors that offer the best opportunities, and discusses portfolio strategies amid geopolitical uncertainty and volatile markets.
Edited excerpts from the conversation:
Equity investors are now worried about the impact of the Iran war, which comes at a time when the market has not made any kind of return in the past 18 months. Besides sustainable SIPs, what is the best solution to tackle this dilemma?
Geopolitical events such as the Iran conflict create short-term volatility but rarely change long-term revenue streams. The main concern here is that 18-month returns have tested investors’ patience precisely when passion is most important. Beyond SIPs, the best navigation strategy is tactical asset allocation, where you gradually place idle money in quality large caps during sharp declines, rather than waiting for certainty.
Avoid rebalancing out of fear. If your portfolio is overstocked in equities due to previous rallies, a partial reallocation to short-term debt provides both stability and dry powder. Geopolitical crises temporarily depress values but rarely depress earnings permanently. Investors who remained disciplined through Covid, the Russia-Ukraine war, and a period of rate hikes were rewarded. Volatility is an equity return rate and is not necessarily an exit signal.
How do you deploy cash in a portfolio during falling stock prices? Which sectors look increasingly attractive in terms of growth and value for FY27?
The method should be stable and satisfactory. Instead of deploying the cash, spread it over 3-4 installments over 6-8 weeks, prioritizing sectors where earnings prospects remain.
Currently, large-cap private banks, select investment names, and pharma offer reasonable entry points. Avoid bottom fishing on broken small caps without income support.
For FY27, sectors that are increasingly attractive in both growth and value include:
- Private sector banking, which is recovering credit growth, has seen stable NIM
- Healthcare/Pharma with Domestic Formulations and US Generic Tailwind
- Infrastructure related capital items with order book view
- Select IT services where AI-driven deal ramp-up occurred after weak fiscal year
- Consumer discretionary also looks selectively attractive as rural demand rebounds with a good rabi season and possible tax-free transfers.
Overall, how cheap is the market considering the Q3 numbers had a one-time impact from the Labor Code?
The Q3 earnings season was distorted. Labor law provisions have created a one-time drag that artificially compresses PAT margins in the retail, hospitality and manufacturing sectors.
Aside from that, the actual income was largely in line. On a diluted basis, the Nifty is trading at 18-19x FY27 estimated earnings, which is close to the long-term average and not cheap, but meaningfully above the 22-23x seen in late 2024.
The broader market (mid- and small-cap indices) has corrected 20-30% from the highs, bringing pockets of real value. The market is not cheap, but it is no longer priced in perfection. For patient 3-year investors, current levels offer a reasonable margin of safety, especially on financial and capex-related topics where FY27 earnings recovery looks more credible.
How comfortable are you with the valuations in the small cap space right now?
Comfort has improved significantly, but caution is still necessary. The small-cap index has corrected ~25-30% from its highs, reducing values clearly from high levels to more reasonable ones.
However, “less expensive” is not the same as “cheap”. Many small caps still trade at premium multiples given their earnings quality and growth forecasts. Liquidity risk also remains high, and in a risk-averse environment, small caps face sharp declines due to low institutional float. We need to be selective rather than exhaustive.
Focus on small caps with strong balance sheets, consistent free cash flow generation, and identifiable earnings catalyst for FY27. Avoid names that move purely without underlying support. A 15-20% allocation to quality small caps in a diversified portfolio is reasonable at current levels – no more.
What’s your read on sector rotation at this stage of the cycle, specifically banking and finance, capital goods, manufacturing, IT services and consumer spending?
We seem to be in the middle age transition, and rotation becomes more important:
- Banking and Finance: After 12-18 months of poor performance, it improves. Valuations are attractive, credit costs are high, and rate cuts will support NIMs during FY26-27. Private banks are better positioned than PSUs at this stage.
- Investment and Production: Still in favor of the structure, but values remain high. Stock specific meaning rather than broad sector terms. Order inflow data will be key to monitor.
- IT Services: Early signs of a rebound in deal speed, especially in the BFSI vertical. AI integration is shifting from a threat narrative to an opportunity narrative. Largecaps are preferred over midcap IT.
- Consumption: The villagers are healthy; Urban moderates. FMCG looks very valuable. Privileges are more interesting in dips.
Circulation promotes finance and information technology over capital goods at current relative values.
What are your thoughts on precious metals? Does it make sense to continue buying gold? If you have Rs 10 lakh to invest, how would you allocate it between gold and silver, equity and debt, keeping in mind a 4-5 year horizon and medium risk appetite?
Gold’s rally is structurally supported by central bank buying, dollar weakening trends, geopolitical risk premiums, and real price uncertainty overall. We are seeing a regime change in how gold is valued globally. Silver has additional industrial demand drivers (solar panels, EVs) making it a high-beta precious metal play.
For Rs 10 lakh for 4-5 years with medium risk appetite:
This balances growth with negative protection. Annual rebalancing of equities and other asset classes.
