Daily Voice: Bottom-up Stock Selection Strategy in Six Sectors Likely to Gain from Resetting Valuations, RBI Rate Pause May Be a Short-Term Halt

Market Outlook: Valuation Reset and Resilient Earnings Expectations

The recent correction and time-wise consolidation in the market have led to a meaningful valuation reset across segments. According to Anil Rego, the Founder and Fund Manager at Right Horizons PMS, earnings expectations, especially in the broader market, remain relatively resilient. This improves the risk-reward equation for long-term investors, particularly from a staggered allocation perspective.

Rego advised focusing on bottom-up stock selection within six sectors, including financials, manufacturing & industrials, healthcare & pharmaceuticals, and defence. These sectors offer a stable foundation for investors, with earnings visibility, balance sheet strength, and structural growth drivers intact.

Market Sentiment and Risk Premia

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The Reserve Bank of India's (RBI) prolonged status quo across the entire year appears unlikely unless there is a significant adverse shift in the macro environment. Rego noted that the RBI's focus will be on anchoring inflation expectations and preserving macro stability, rather than signalling any imminent easing cycle.

The RBI is likely to maintain status quo on rates, but the commentary could carry mildly hawkish undertones. With oil prices firming up and global uncertainties rising, the RBI will be cautious and data-dependent in its policy decisions.

Economic Growth and Oil Prices

Economic growth is likely to remain resilient and trend in the around 6.5-7 percent range for the current financial year, despite geopolitical uncertainties. Elevated crude oil prices remain a key risk, but the impact is typically ~20-40 bps on GDP for every $10 a barrel increase.

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Investment Strategy and Market Return

The strategy remains to focus on bottom-up stock selection within these sectors, prioritising businesses with strong management quality and sustainable earnings growth. Rego expects near-term volatility, making a phased approach more prudent than aggressive deployment.

The current setup is supportive, with valuations having corrected meaningfully and moved closer to historical averages. Historical evidence suggests that periods of valuation compression without earnings downgrades tend to offer attractive forward return potential. Factors such as crude oil volatility, global liquidity conditions, and FPI flows, however, could lead to intermittent drawdowns.

Market Return Expectations

It is reasonable to assume at least a 10 percent market return in FY27, given the current valuation comfort and earnings visibility. However, factors such as crude oil volatility and global liquidity conditions could lead to intermittent drawdowns.