Despite recent corrections in Indian equities, market valuations remain stretched and investors should exercise caution while being selective, according to Venkatesh Balasubramaniam, MD & Head of Research at JM Financial Institutional. Speaking to ET Now, Balasubramaniam expressed concerns about market valuations that have persisted for over a year, with the Nifty 50 currently trading at around 21 times one-year forward earnings—significantly above its long-term average.

Valuation Concerns Persist Despite Market Correction

Balasubramaniam highlighted that foreign institutional investors have shown limited interest in India due to stretched valuations and a lack of near-term triggers. He emphasized that while EPS growth of 15-20% could justify a 20x multiple, current valuations should ideally move closer to the long-term mean of 17-18 times. However, strong domestic flows have prevented meaningful valuation correction, with systematic investment plan inflows reaching nearly ₹310 billion in the last month alone.

Divergent Performance Across Market Segments

While largecaps have experienced only mild corrections, the broader market has faced significant pressure. Balasubramaniam noted that smallcap and microcap stocks have declined 40-50% over the last six months, causing substantial pain to personal portfolios. He believes real opportunities will gradually emerge in select smallcap and microcap stocks over the next 6-12 months as valuations correct further.

The expert advised staggered investing rather than aggressive lump-sum deployment, citing risks of another leg down amid global uncertainties.

Domestic Flows: Compulsion Rather Than Confidence

Balasubramaniam questioned whether continued domestic institutional investor buying reflects genuine confidence or mere compulsion. He observed that mutual funds receive steady inflows and are forced to deploy capital, which may not necessarily represent a strong vote of confidence at current valuations. This dynamic has contributed to keeping foreign institutional investors on the sidelines or pushing them into selling mode.

Sectoral Preferences and Investment Strategy

JM Financial maintains an underweight stance on several sectors due to specific concerns:

Underweight Sectors:

• Banks (weak EPS growth due to margin compression in rate-cut cycle)
• Utilities
• IT services (structural concerns from global capability centres)
• Pharmaceuticals (potential EPS declines in large pharma companies)

Preferred Sectors:

• Consumer and consumption-linked stocks
• Autos and auto ancillaries
• NBFCs
• Hotels, real estate, and internet businesses

Specific Stock Recommendations

Within the preferred sectors, Balasubramaniam highlighted specific stock preferences:

Budget Expectations and Market Outlook

Regarding the upcoming Union Budget, Balasubramaniam tempered expectations, noting limited fiscal space and that most significant reforms have already been delivered. He does not expect market-moving announcements and cautioned that a post-budget sell-off cannot be ruled out. From a macro perspective, he views India's economic fundamentals as stable, supported by income tax cuts, GST rationalization, RBI rate cuts, and liquidity infusion, while flagging currency depreciation and potential infrastructure capex moderation as areas to monitor.

Indian equity markets have shown resilience in recent sessions, with market breadth remaining supportive despite incremental weakness over the past week. While near-term volatility has emerged, market experts believe the broader structural story remains intact, driven by improving earnings visibility and potential global developments.

Mixed Earnings Performance with Improving Outlook

Mayuresh Joshi, Head Equity at Marketsmith India, noted that the current earnings season has delivered mixed results. PSU banks have largely held up in terms of earnings delivery, while other sectors have performed in line with estimates or slightly below expectations.

However, Joshi expects the earnings outlook to improve meaningfully as the year progresses. He pointed out that once channel inventory rationalisation plays out post-GST, particularly across consumer durables, discretionary and staple segments, numbers could see a sharp rebound.

Global Factors and Market Volatility

According to Joshi, global events remain a key overhang for market performance. Markets could remain volatile depending on geopolitical developments and trade-related commentary from the US. He specifically mentioned concerns about potential policy changes and their impact on market sentiment.

On the positive side, Joshi highlighted the potential impact of international trade agreements. The India-EU FTA deal could be a massive game changer for India as it materialises. Additionally, any potential US trade deal in the coming days and weeks could allay market concerns and refocus attention back to earnings fundamentals.

Small Finance Banks Show Promise

Select small and mid-sized banks have emerged as recent outperformers, with strong price action following earnings announcements. Stocks such as CreditAccess Grameen, Ujjivan and Bandhan Bank have been in focus amid signs of improving fundamentals.

Joshi noted that expectations for small finance and payment banks are improving as stress in the ecosystem begins to ease. Earlier challenges stemming from MSME slowdowns and delinquency issues appear to be stabilising.

Market Positioning and Opportunities

Despite acknowledging a rise in distribution days tracked by Marketsmith India, Joshi stressed that such phases often create opportunities for identifying quality sectors and leadership stocks that could form the basis for the next bull run.

As growth expectations strengthen, asset quality pressures in the banking sector are likely to moderate. The expectation is that both reported numbers and return ratios should show improvement, which the market is closely watching.

While near-term volatility cannot be ruled out, the improving earnings outlook and stabilising financial sector trends suggest that markets may be better positioned as they move forward, provided global uncertainties do not escalate significantly.