Edited excerpts from a chat with Pradeep Kesavan, Fund Manager & Equity Strategist at SBI Mutual Fund.
How are you reading the current market setup? Is this a time to be cautious or bold?
In our view, equity market returns are a function of (i) Valuation, (ii) Fundamentals and (iii) Sentiments. While valuations appear expensive on conventional valuation metrics (P/E, P/B, Market cap / GDP etc.), a more nuanced yield differential model (equity yield vs. bond yield) shows that valuations are currently around long-term average levels. On corporate fundamentals, we are seeing some short-term challenges, reflected in muted bottom-line growth for FY25 and downward revisions in FY26 expectations. The complex global environment further adds to the uncertainty. Having said that, the medium-to-long term economic fundamentals of India remain intact and we assess this to be in a neutral zone.
Sentiment, being a contrarian indicator, calls for caution when sentiments are bullish and a constructive stance when sentiments are bearish. On this front, sentiments have moderated from highly bullish levels to a more neutral level. Taking all these factors into account, our current market view is neutral. We are neither cautious (as we were a few months ago) nor do we think this is the time to go bold. It is important to note that this view of the market primarily applies to large caps and not to the broader market.
Do you see froth building in certain segments, especially in the broader market?
While we remain neutral at the overall market level, the story looks different when comparing the narrow market to the broader market. The broader market rally over the past 4 years (barring the last few months) has taken valuations of small and mid-caps to extreme levels, especially relative to large caps. Considering this, our current view favours large caps over small and mid-caps.How are you thinking about sector rotation right now? Which sectors are showing early signs of leadership for the next leg of the rally?
Sector leadership has been very volatile over the past year. BFSI continues to look attractive and within that we believe larger, better quality private banks should do well. Life Insurance is another area where we remain positive. We expect consumption, especially rural and lower end segments, to do well in the coming months. Additionally, Energy and Metals are also poised interestingly, in our view.
From a quant perspective, how have key factors like momentum, value, and quality performed over the past year? Any surprising shifts?
In terms of style factors, post COVID, we saw Value take the lead from Quality (which dominated pre-COVID) and continued to perform well during the 2021-2023 period. 2024 saw the return of Growth. So far, in 2025, the market is reverting to Value. Broadly speaking, in a market lacking growth, a shift from growth to value is not surprising. However, historically, Quality has been the preferred style when earnings dry up. This is something we are closely monitoring.
Looking at the next 12–18 months, what are the biggest risks to your current market thesis?
Post COVID, despite a few years of strong earnings growth, the topline growth has remained tepid. This is largely due to overall demand weakness, which is a concern for us at the moment. We need to see a broad-based pickup in economic activity, and the improvement must be reflected strongly in corporate toplines. A prolonged environment of anaemic topline growth environment is a risk that we are concerned about as well.
How do you approach asset allocation in times like these? If you have Rs 10 lakh to invest, how would you divide it between stocks, debt, and gold/silver?
We are currently neutral when choosing between Fixed Income and Equity, because on a risk-adjusted basis we expect both asset classes to deliver comparable returns or perhaps with a slight edge in favour of equity. If you can include commodities like gold/silver, our suggested allocation would be: 15% in Gold/Silver, 45% in Equity and 40% in Fixed Income.
We have seen a lot of interest building in flexicap and multi-asset funds. For a new investor with a moderate risk profile, are these two categories best to begin the investing journey?
Absolutely. Flexicap Funds are one of the most dynamic mandates today, giving fund managers the flexibility to invest across market capitalization and sectors without constraints. This makes these funds an ideal “go-to” equity category for new investors. Multi-Asset Funds provide the benefit of diversification across asset classes and can be effective in minimising drawdowns, an appealing feature for new investors. I would also recommend the Balanced Advantage Funds category along with these two, as another strong option for new investors.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)
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