Market Outlook Remains Uncertain, Expert Says Banks Hold Promise

Market Risks Persist Amid Global Uncertainty

The ongoing US-Iran conflict and its impact on global oil prices continue to pose significant risks to the Indian markets, according to Mittul Kalawadia, Senior Fund Manager at ICICI Prudential AMC. In an interview with Mint, Kalawadia expressed concerns that the worst may not be over for the markets unless the conflict is completely resolved.

Global Liquidity and Oil Prices: Key Drivers of Market Trends

Kalawadia is closely watching key macro triggers, including liquidity and the evolution of bond yields globally, as well as the rupee's trajectory on the domestic front. These factors will dictate the market trend, and any disruption in the Strait of Hormuz could lead to further volatility. The availability of products derived from crude oil and the duration for which oil prices remain elevated are critical factors to consider.

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

Short-Term vs. Long-Term Outlook

While a short-term disruption in oil prices may not have a significant impact, a prolonged period of elevated oil prices could lead to further downside. In this scenario, the second and third-order effects of higher oil prices would become more relevant for both earnings and valuations.

Risk-Reward Opportunities

Kalawadia is positive on banking and certain pockets of discretionary consumption, which offer reasonable valuations and growth expectations. Parts of the anti-crude basket, such as cement and manufactured goods exporters, also appear attractive from a risk-reward perspective.

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

SEBI's Specialised Investment Fund (SIF) Framework

The SIF framework is being positioned as a bridge between mutual funds and PMS/AIFs. From an investor's perspective, SIFs offer greater flexibility in investing across market capitalisations, asset classes, and instruments, allowing fund managers to construct portfolios more dynamically and potentially deliver better outcomes over the long term.

Q4 Earnings and Monetary Tightening

Kalawadia expects the next one or two quarters to be challenging for earnings, either on the margin front, the revenue front, or both. If the Strait of Hormuz disruptions persist and the outlook remains negative, weaker earnings will weigh on company performance and stock prices.

Vulnerability to Liquidity Tightening

Every segment of the market carries some degree of risk, but the larger vulnerability lies in those names where valuations are expensive and the narrative is a large part of the investment thesis. Sectors such as semiconductors, companies that have benefited from the AI-related ecosystem, and defence as a theme are areas where valuations have become expensive.

iSIF Equity Long Short Fund

The iSIF Equity Long Short Fund differs from a traditional flexi-cap fund in its flexible use of derivatives, which allows the fund manager to manage portfolio risk effectively and enhance the ability to generate alpha in a range-bound market environment.

Macro Indicators

Kalawadia is concerned about liquidity and the evolution of bond yields globally, as well as the currency trajectory on the domestic front. While the current account deficit is important, if the currency remains stable, the overall level of CAD concern reduces significantly.

Adapting Long-Short Strategies

The fund house is adapting the long-short strategy within a mutual fund-regulated structure by following a flexi-cap or diversified portfolio structure, which is better suited for investors with a long-term investment horizon.