Expert view: Sanjay Chawla, Chief Investment Officer (CIO) – Equity, Baroda BNP Paribas Mutual Fund, says crude oil prices after the end of the US-Iran war, and earnings growth of Indian corporates are the two factors that will dictate the market trends over the short to medium-term. In an interview with Mint, Chawla said he remains confident about India’s earnings growth story, but added that a near-normal monsoon would be crucial to sustaining that growth momentum. Edited excerpts:
We may see a relief rally after a US-Iran peace deal, but can that be sustained? Do you think the impact of higher crude oil prices will fade quickly?
If the war is genuinely over in the short term, markets may react positively. There is no doubt that higher crude and the non-availability of LNG and LPG are impacting India’s Current Account Deficit (CAD) materially.
Consequently, the Indian rupee has been one of the worst-performing currencies since the war began. Over the period of time, two things would determine the trend in the market: (i) Crude prices after the war ends, and (ii) India’s earnings growth.
Based on the assessment of infrastructure damage and the ability to spring back to pre-war production levels, the crude prices would be determined. We are more confident of India’s earnings growth story, the only caveat being that the monsoon is at least near normal.
The macro picture has been hit due to the Middle East tensions. There is a possibility of a poor monsoon this year. Even rate hikes look possible this year. How can all this affect the market sentiment?
There are a number of macro factors impacting the Indian economy, including the supply disruption of energy.
A poor monsoon will potentially lead to higher inflation due to food inflation being a relatively large and volatile component of CPI.
With higher inflation, higher CAD and slower economic growth, it is all likely to have a bearing on the central banker before deciding the next course of action in the next Policy meeting.
Slower economic growth usually leads to earnings being impacted. When the macros are not favourable, then the chances of Foreign Portfolio Investors (FPI) looking at India favourably are low.
DIIs have been buying, but the market has not been able to deliver returns over the last year. Why should retail investors continue their SIPs?
Time and again, it has been shown that real wealth is created when investors approach investing in a disciplined manner, sticking to their asset allocation plan to meet their financial goals.
Equity investing is all about investing for the long term, for more than 5 years. This is when compounding magic starts becoming visible. Returns during these 5 years are unlikely to be evenly spread.
Historically, we have seen periods when equity markets have given tepid returns, but eventually the resilience of the Indian economy comes to the fore, driving earnings growth.
Equity markets are slaves to earnings. Consolidation in equity markets provides a very good opportunity for investors to increase their allocation to equity.
Why are mid and small-caps outperforming despite so many headwinds for the market?
Across the cap curve, large caps have been very steady and consistent performers.
On a relative basis, mid-caps have fared better than large and small-caps in most time periods.
Small-caps had been impacted due to earnings growth being very poor. Plus, too much money flow had led to valuations getting stretched.
While the earnings growth for mid-caps has recovered and sustained for the past couple of quarters, we have seen green shoots for small-cap earnings recovery for the quarter ending March 2026.
Obviously, this earnings growth has not seen the impact of war. The litmus test for the same would be visible in the first half of FY27.
Should we focus more on value in this market? Which sectors offer the most value at this juncture?
At this juncture, the entire market is in the value zone. The question that one needs to ask is, are there any triggers for value unlocking?
The war in the Middle East is closer to an end and may not escalate as we had seen at the start of the war.
This should help with the energy security of the country. Hopefully, with macros turning positive, FPIs would stop selling Indian equity and start buying on the margin.
The big turnaround would be visible when earnings come back. Consensus expectations have already been cut, and it is modest growth for the current year. In the next couple of months, the market will start factoring in FY28 earnings, which are expected to be better than FY27.
One sector that we are expecting to grow from a growth perspective is the defence sector. We potentially see a multi-year growth story panning out based on the increase in defence budgets for all the countries around the world.
Not a classic value play since the valuations are not exactly cheap. A lot would depend on execution and capitalising on emerging opportunities overseas.
Is it time to increase exposure to debt and gold?
I think the most important factor to create wealth is the appropriate asset allocation.
A portfolio which does well in different environments. The approach is to have an optimum mix of assets to achieve the financial goals.
Both debt and gold should also be part of the asset mix that one has in their portfolio. The mix would depend upon investment objectives. Gold has had a dream run so far.
Instead of chasing growth, one should make an incremental asset allocation where there is value in the market.
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Disclaimer: This story 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.
