Almost Half of Market Capitalization Now Trades at Reasonable Valuations, Says DSP Mutual Funds' Sahil Kapoor

DSP Mutual Fund Turns Constructive on Equities

DSP Mutual Fund, a leading investment manager, has shifted its stance on equities from cautious to constructive, driven by a meaningful correction in valuations across segments, particularly large caps. According to Sahil Kapoor, Head of Products and Market Strategist at DSP Mutual Fund, the fund house is now recommending investors to "buy stocks".

Opportunities Across the Market

Valuations have eased with the Nifty trading closer to around 19x, despite subdued earnings and muted expectations. This combination of lower valuations and weak sentiment presents a more favorable entry point for investors. Kapoor notes that nearly half of India's market capitalization offers reasonable pricing, with sectors such as banking and financial services, IT, insurance, FMCG, chemicals, and parts of the energy space seeing pockets of value.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

Increasing Allocation in Equities

The fund house is increasing its allocation in equities by reallocating from cash and short-term instruments, while maintaining exposure to long-term bonds to preserve diversification. Kapoor emphasizes that this is a valuation-driven call, not a macro-driven one. The fund house is increasing its allocation in large caps, which are trading at attractive valuations.

Finding Opportunities

Kapoor highlights opportunities in banking stocks, citing large private banks generating around 2% return on assets and operating with leverage of 7-8x, translating to potential return on equity of 15-17%. Even assuming a more conservative return on equity of 14-15% and stocks trading at around or below 2x book value, investors can expect stock prices to broadly track underlying book value growth.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

Gold and Silver

While gold and silver have corrected from earlier elevated levels, they are not yet compelling enough for aggressive buying. Investors may consider maintaining a strategic allocation but should wait for more attractive entry points before increasing exposure.

Risks

Kapoor acknowledges concerns around oil prices and geopolitics but notes that such uncertainties are largely unpredictable and already reflected in current market prices. He emphasizes that stocks become cheap when fear is high, and when prices are low, the actual risk of owning equities is lower.

Volatility in Oil Prices

Kapoor advises investors to be guided by data, noting that past cycles like 2008 and 2022 saw oil prices stabilize after 4-5 months. He highlights the current situation as a "supply chain, not supply" issue and believes that markets will respond ahead of reality, pricing in potential resolutions.