Expert view: Ashutosh Tiwari, MD and CIO- Public Equities, Equirus Asset Management, believes the risk-reward appears favourable from a medium-term perspective. He emphasises that attempting to wait for complete clarity or stability can often prove counterproductive, as markets tend to discount improving fundamentals well before they become obvious. In an interview with Mint, Tiwari said the peak of the is behind us, as neither side has a strong incentive to pursue a prolonged escalation. Edited excerpts:
Considering the recent developments in the Middle East, it appears geopolitical uncertainties remain among the biggest risks for the stock market. What are your assessments of the situation?
We believe that peak of conflict is behind, as neither side has a strong incentive to pursue a prolonged escalation, given the significant economic and geopolitical costs involved.
One of the key lessons from the Russia–Ukraine conflict has been that drawn-out wars are expensive, difficult to sustain, and increasingly shaped by new technologies.
The evolution of warfare, particularly the widespread use of drones, has materially altered the cost equation. While many countries possess sophisticated missile-defence systems, intercepting low-cost drones with highly expensive air-defence assets is neither efficient nor sustainable over an extended period.
This dynamic acts as a natural constraint on prolonged military engagement.
The United States also has a limited appetite for a long conflict in the region, particularly given its strategic interests and alliances across the Middle East.
This is reflected in financial markets, where crude oil prices have retraced sharply from their recent peaks—far more than many investors had anticipated.
Going forward, we believe the trajectory of the conflict will be closely linked to oil prices.
As long as crude oil prices remain relatively benign, occasional ceasefire violations and localised tensions may persist, but the incentives for a broader escalation remain limited.
Conversely, a sustained rise in energy prices would create economic pressures on all stakeholders and increase the urgency for diplomatic resolution.
Iran, in particular, faces important economic constraints. Its major trading partners, especially China, have little interest in a prolonged conflict that drives energy costs higher and disrupts trade flows.
Notably, China’s reduction in oil purchases during the recent escalation helped moderate crude prices and contributed to market stabilisation.
While such measures may not be sustained indefinitely, they underscore the broader international incentive to prevent the conflict from spiralling further.
Nifty has delivered almost zero returns over the last two years despite the Indian economy rising by over 7%. Why has economic growth not resulted in a robust market performance?
Historically, the Nifty 50 has tended to peak around 25 times trailing P/E, and by September 2024, valuations had reached those levels.
At the same time, nominal GDP growth moderated sharply, declining from approximately 14% and 12% in FY23 and FY24 to about 10% and 9% in FY25 and FY26, respectively.
This is an important distinction because corporate earnings tend to have a stronger correlation with nominal GDP growth than real GDP growth. Slower nominal growth naturally translated into lower earnings growth expectations across several sectors.
As a result, the market underwent what was largely a valuation-led correction rather than a growth-led correction. Investors were no longer willing to pay peak multiples for earnings that were expected to grow at a more moderate pace.
In essence, the market spent the last two years adjusting to a more normalised growth environment after a period of exceptionally strong post-pandemic recovery.
Is this market worth investing in, or should we wait for more stability?
Markets tend to move in cycles of excess—both on the upside and the downside. If September 2024 represented a period of excessive optimism, March 2026 marked the opposite extreme, with Nifty valuations falling to their lowest levels in nearly a decade (excluding the COVID-led dislocation).
That sharp derating laid the foundation for the strong recovery witnessed over the last three months.
Even after the recent rally, the Nifty is trading at roughly 22 times trailing P/E, which we view as a reasonably attractive level in the context of India’s long-term growth prospects.
Historically, market cycles have often seen valuations gravitate toward 25 times trailing P/E at peak optimism, and we believe there is scope for valuations to move closer to those levels again over the next two years, provided earnings growth remains supportive.
From a medium-term perspective, therefore, the risk-reward appears favourable. Attempting to wait for complete clarity or stability can often prove counterproductive, as markets tend to discount improving fundamentals well before they become obvious.
The recent rebound itself is evidence of how quickly sentiment can shift once valuations become attractive.
Another factor worth monitoring is the potential shift in global capital flows.
The AI-led rally in global technology stocks appears to be facing increasing valuation scrutiny, which could moderate investor enthusiasm toward a narrow set of global themes.
As capital begins seeking broader opportunities, India remains well-positioned given its relatively strong macroeconomic fundamentals, policy stability, and long-term structural growth outlook.
This could support a recovery in FII flows, which have remained subdued over the past two years.
What sectors would you bet on at this juncture? What drives your bullish views for them?
For over two decades, China pursued a deliberate strategy of becoming the world’s manufacturing hub.
Supported by export incentives, production subsidies, and aggressive capacity creation, Chinese manufacturers prioritised scale and market share over profitability, creating significant global dependence on Chinese supply chains.
However, recent developments suggest that China is gradually recalibrating its industrial strategy.
The focus has increasingly shifted toward improving industry profitability, reducing excess capacity, and ensuring more rational competition.
While this transition is likely to be gradual, it could have meaningful implications for global manufacturing dynamics.
Importantly, this shift is being reinforced by currency movements.
The Chinese yuan has appreciated significantly against the Indian rupee over the past year after remaining largely range-bound for an extended period.
A stronger yuan improves the relative competitiveness of Indian manufacturers, both in domestic markets and, more importantly, in export markets.
At the same time, global corporations—particularly in the US and Europe—continue to diversify supply chains and reduce dependence on China.
This “China+1” strategy remains a powerful structural trend, and India’s improving cost competitiveness positions it well to capture incremental market share across multiple manufacturing segments.
We are also becoming increasingly constructive in the financial sector.
The sector has significantly underperformed over the last two years due to concerns around deposit growth, competitive intensity, and moderation in credit growth.
However, much of this caution now appears reflected in valuations.
With the broader market correction behind us and Nifty valuations normalising, financials will also benefit from the expected improvement in FII flows.
What should be our investment strategies? Can mid and small-caps outperform due to their limited exposure to foreign flows?
Large-cap stocks have largely been laggards over the last two years despite a resilient economic backdrop.
As a result, valuations have become much more reasonable compared to the broader market.
If, as we expect, foreign institutional investors (FIIs) begin increasing allocations to India again, a significant portion of those flows is likely to be directed toward large caps given their liquidity, scale, and benchmark representation.
Therefore, large caps look good.
Mid-cap valuations look stretched to us, however, with small-cap, there are good opportunities, especially companies below ₹5,000 crore market cap, where valuations are reasonable from a trialling P/E perspective.
How far is the material earnings improvement? Can it be sooner or after Q3 or Q4FY27?
We believe earnings growth is likely to remain relatively subdued in 1HFY27, with both demand and margins facing near-term pressure.
Elevated inflation has impacted consumer spending in certain segments, while many companies have found it difficult to fully pass on higher input costs, leading to margin compression.
That said, we view these pressures as largely temporary. Commodity prices have already begun to soften, and if this trend continues, it should provide relief on two fronts.
First, lower input costs will support margin expansion across a wide range of sectors.
Second, softer commodity prices can improve disposable incomes and stimulate demand, particularly in consumption-oriented segments of the economy.
As a result, we expect the benefits of lower costs to start becoming visible from Q3 FY27 onwards.
Both revenue growth and profitability should improve as companies regain pricing flexibility and operating leverage begins to play out.
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Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.