Deploy cash in market fall but avoid extreme calls: Srinivas Rao Ravuri

Edited excerpts from a chat:

Equity investors are now worried about the impact of the Iran war which comes at a time when the market hasn’t provided any return in the last 18 months. What is the best solution to navigate this crisis, besides continuing SIPs?
The recent escalation of geopolitical tensions in the Middle East has added another layer of uncertainty for Indian equity markets, which have delivered virtually no returns over the past 18 months and have underperformed most global peers. India imports a significant portion of its energy requirements, particularly crude oil, and a sharp spike in oil prices has historically been negative for the domestic economy and markets.Beyond energy dependence, the Middle East is also important for India from a trade and remittance perspective, with a large number of Indians employed in the region contributing significantly to inward remittances. Given these interlinkages, it is natural for Indian markets to react with caution to geopolitical volatility in the region.

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However, much will depend on how quickly the situation stabilizes. Historically, such geopolitical escalations have tended to be transitory and, in hindsight, have often proved to be good entry points for long-term investors.

In our view, the best way to navigate such phases is to stagger investments rather than take an extreme call on the market. After the 18-month time correction, equity valuations have moderated from relatively elevated levels, and markets were already awaiting an earnings recovery catalyst before the recent escalation. If the situation de-escalates relatively quickly, markets could rebound sharply. Maintaining a long-term perspective and a disciplined approach can help investors benefit from such opportunities.

How are you deploying cash across portfolios amid the decline in share prices?
We generally do not take large cash calls in our portfolios. However, at the margin, we are deploying cash during the current phase of market correction, which will bring our cash levels to below-average levels across portfolios.

Such corrections also provide an opportunity to realign portfolios by increasing exposure to potential winners while reducing positions in laggards. We are undertaking these portfolio adjustments wherever suitable opportunities present themselves.

Which sectors are increasingly looking attractive from both growth as well as valuation perspective for FY27?
Consumer durables stand out as our clear sectoral bet for FY27. Most segments within consumer durables remain significantly underpenetrated and therefore offer a long runway for growth.

The sector has seen a sharp correction in valuations over the past 12 months following a period of weak demand due to a milder summer season last year. We believe that a normal summer this year could revive demand, particularly for cooling products such as air-conditioners and refrigerators.

Beyond these, we expect other segments such as lighting and small appliances to also deliver robust growth. Overall, we believe the sector could witness a combination of earnings recovery and some degree of multiple expansion over the next 12 months, which could translate into meaningful outperformance.

How comfortable are you now when it comes to valuations in the smallcap space?
We have been cautious on the small and midcap space for some time and have preferred large caps instead. This stance has worked well in recent months, with large caps generally outperforming the broader market.

Elevated valuations in the small and midcap segment were one of the key reasons behind our cautious view. While valuations have moderated somewhat following the price correction and better earnings delivery in recent quarters, they still remain elevated compared to their own historical averages.

Additionally, during periods of heightened macro uncertainty, the small and midcap segments tend to be more volatile than large caps. Given this backdrop, we continue to prefer large caps overall, while selectively evaluating opportunities in the small and midcap space on a bottom-up basis.

What is your reading of sectoral rotation at this stage of the cycle, particularly across banking and financials, capital goods, manufacturing, IT services and consumption?

Sector rotations in Indian markets have been particularly sharp in recent months. For instance, in February the IT index declined by nearly 20% even as most other sectoral indices were positive. In such an environment, getting sector allocation right becomes increasingly important for generating alpha.

At this stage, we are more positively inclined towards Consumption and BFSI. Within consumption, we prefer discretionary segments such as automobiles and consumer durables, as we believe that the recent GST rate rationalization has improved affordability and could support stronger demand in the coming quarters.

We are also constructive on BFSI, particularly private sector banks. The earnings trajectory for this segment appears to be on the cusp of improvement, supported by a recovery in credit growth, potential margin expansion from current levels, and continued benign asset quality trends.

If you have Rs 10 lakh to invest, how would you divide it within gold and silver, equity and debt considering if you have a 4-5 year horizon and medium risk appetite?

Such asset allocation decisions are ideally addressed by financial planners who can take into account an individual’s specific financial situation and risk profile.

That said, between equity and debt, at this juncture, we believe equities offer a more favorable risk–reward equation. With the possibility of an inflation spike due to higher crude oil prices, the likelihood of further rate cuts by the RBI appears remote at this point. In the absence of rate cuts, bond yields are unlikely to soften meaningfully from current levels, and therefore fixed income investments may largely deliver accrual-based returns over the next 12–18 months.

Equities, on the other hand, have already undergone a meaningful time correction and, given the robust earnings growth expectations for FY27 and FY28, appear relatively more attractive. That said, there are risks to this view. A prolonged geopolitical conflict that begins to impact corporate earnings could weigh on equity markets. Similarly, any sustained slowdown in retail flows due to market volatility could also affect equity returns.

Still, we believe that if one has a relatively longer time horizon (at least 3-5years) equities appear relatively better positioned to deliver returns over a medium-term horizon and hence at the margin one may consider increasing equity allocation within their portfolio gradually from here on.