Selective and Cautious Approach Advised by Sahil Kapoor of DSP Mutual Fund

Indian equities, across market capitalization, are currently trading at high valuations. Historical data indicates that when the Nifty trades above a P/E ratio of 22 and with a ROE below 13%, the 3-year forward return tends to be less than 10% CAGR. Mid- and small-cap stocks are also trading above their long-term average valuations. Given the slowing sales growth for many firms, the key to market gains lies in margin expansion. This calls for a selective and cautious approach.

Sectors like BFSI, healthcare, and some consumer names may still offer attractive prospects based on their valuations and consistent earnings growth.

Given the elevated equity valuations, diversifying across asset classes makes sense. A multi-asset allocation strategy is advisable, particularly for investors with a long-term horizon of five years.

With an inverted yield curve and disinflation trends, investors with an appropriate risk appetite could consider buying long-duration bonds in anticipation of yield reduction.

A well-balanced approach involving domestic equities, global equities, Indian bonds, and gold is recommended. Investors can achieve this through diversified multi-asset allocation funds.

Banking stocks, in general, appear relatively inexpensive, with price-to-book ratios below historical averages. A positive outlook suggests adopting a buy-on-dips strategy in this sector.

While the capital goods sector enjoys robust order book growth and healthy return ratios, it is trading at high valuations, implying a lower margin of safety. A bottom-up approach is advisable here.

In the recent quarters, Indian players in the US generics market have seen growth due to reduced price erosion and new product launches. Supply disruptions, bankruptcies, and US FDA actions have impacted the market. Nevertheless, expectations are for normalization of prices in the US generics market. In the domestic formulations business, strong double-digit growth has resulted in robust cash flows. Expansions in medical representative teams are expected to enhance geographical reach and doctor coverage, offering potential benefits. Overall, a positive outlook remains for the US generics and domestic formulations business, as well as the sector as a whole.