Are we witnessing a market bottom? Nilesh Shah, the managing director at Kotak Mahindra Asset Management Company, believes we are currently in a fair value market. He notes that stock prices are aligning closely with historical averages, yet selling pressure may persist until Foreign Institutional Investors (FIIs) return to buying. With expectations of Nifty earnings reaching between ₹1,150 and ₹1,200 per share for FY26, Shah suggests that India has the potential to benefit from global growth if managed strategically.

Market Sentiment and Investor Behavior

In a recent dialogue with FinancialExpress.com, Shah discussed the current state of the Indian markets. He emphasized that while the market may fluctuate like a voting machine in the short term, focusing on fundamentals is crucial for long-term strategies. Presently, foreign investors are leaning towards selling, which could further depress prices. He noted:

“As long as FPIs continue their sell-off, it’s likely that prices will keep declining. The moment they stop selling, we could see a market rebound.”

Mid and Small-Cap Analysis

Turning his attention to mid and small-cap segments, Shah pointed out that there are two distinct categories: momentum stocks and quality stocks. While momentum stocks have already experienced significant declines, he anticipates that further pain could be in store for these lower-quality investments. In contrast, he believes that quality mid and small caps are nearing their bottom. He stated:

“Currently, quality stocks are trading around their historical averages, making it a fair value market rather than a cheap one like during the March 2020 pandemic.”

Strategic Investment Approaches

When it comes to investment strategies, Shah advocates for a balanced approach. He suggests maintaining an allocation to equities that aligns with individual risk profiles and investment goals. Here are his recommendations:

• Focus on Large Caps: These are currently undervalued compared to historical averages.
• Caution with Small and Mid Caps: Wait for further corrections before increasing exposure.
• Cash Reserve: Keep some liquidity to capitalize on market dips.

Shah warns against making large investments all at once due to existing uncertainties ranging from geopolitical tensions to domestic earnings.

Sectors with Potential

Shah identifies several sectors that offer attractive valuations:

• Banking and Financial Services: Valuations in this sector appear reasonable.
• Consumer Discretionary: Tax incentives and government initiatives, like the upcoming 8th Pay Commission, are anticipated to bolster consumer spending.

He advises caution in sectors perceived as overvalued, especially low-floating stock counters, which could face additional declines. Furthermore, he expresses concern about the BPO sector due to the impact of artificial intelligence.

Expectations for Foreign Institutional Investors

Looking ahead, Shah predicts that FIIs will continue their selling trend for a while longer. He expressed optimism that as market conditions evolve, particularly with upcoming IPOs and improvements in governance, foreign investors may start to view India more favorably. He remarked:

“With a potential shift in earnings growth to double digits next year, India remains a long-term growth opportunity.”

Assessing the Rupee and Global Opportunities

Shah pointed out that the future trajectory of the Indian rupee will largely depend on developments in China. He highlighted the competitive nature of currency movements, particularly in relation to trade dynamics with China.

He believes India stands to gain from a global economic shift, provided it can position itself as a preferred alternative to China.

Earnings Projections and Growth Outlook

As the Q4 earnings reports approach, Shah anticipates that Nifty earnings per share could range between ₹262 and ₹275. For FY26, he forecasts earnings growth that might elevate EPS from ₹1,030 to between ₹1,150 and ₹1,200. He noted:

“While reaching ₹1,200 may require favorable conditions, ₹1,150 seems quite achievable.”

The potential for India to achieve mid-single-digit GDP growth hinges on favorable global conditions and effective policy decisions.

In conclusion, while uncertainty looms over the market, staying informed and strategic is crucial for navigating these turbulent times. Investors are encouraged to adopt a measured approach, focusing on quality stocks and remaining adaptable to evolving market dynamics.