3 weeks ago
Indian Markets Polarise as Valuation Gaps Widen Across Sectors
India’s stock market is split into groups that investors value very differently.
Some smaller companies and cyclical businesses have become expensive after their profits improved.
Nuvama Wealth Management thinks investors may be assuming that this improvement will last for a long time.
It says AI-related spending, GST cuts, and easier rules from the Reserve Bank of India helped many companies.
However, weaker incomes, a poor monsoon, and supply problems could hurt profits later.
Slower growth in AI spending could also reduce support for exports and metal prices.
Higher bond yields around the world may make investors less willing to buy risky assets.
Nuvama therefore prefers larger companies and defensive sectors.
It is cautious about small- and mid-cap stocks and several cyclical sectors.
Nuvama Wealth Management says Indian equities are sharply divided by sector valuations, market capitalisation, and defensive versus cyclical exposure.
The brokerage attributes the polarisation to AI-related capital spending, domestic stimulus, and a cyclical earnings recovery.
Small- and mid-cap stocks and cyclical sectors have outperformed as global trade, goods consumption, and policy easing supported earnings.
Nuvama warns that supply shocks, weak incomes, a poor monsoon, slowing AI capital spending, and higher global bond yields could pressure markets.
The brokerage favours large caps and defensives, including IT, private banks, chemicals, consumer, pharma, cement, and internet companies.
- Who
- Nuvama Wealth Management and investors in Indian equities.
- What
- The Indian stock market has become highly polarised, with unusually wide valuation differences between sectors, company sizes, and defensive and cyclical stocks.
- Where
- India, with additional risks linked to global markets and bond yields in the United States, Europe, the United Kingdom, and Japan.
- When
- The analysis concerns current market conditions and warns of risks emerging from Q2FY27 and H2FY27.
- Why
- AI-related capital spending, domestic stimulus, and cyclical earnings recovery have benefited some sectors, while changing global macroeconomic conditions and weak domestic income dynamics create risks.
Contrarian Repositioning
Cyclical Continuation
Market leadership
Contrarian Repositioning
Nuvama believes the valuation gap favours a shift toward large caps and defensive sectors after the strong performance of smaller companies and cyclicals.
Cyclical Continuation
The recent earnings recovery has benefited small- and mid-caps and cyclicals, particularly because of AI capital spending and domestic policy support.
Sustainability of earnings
Contrarian Repositioning
The recovery may weaken as inventory gains reverse, supply-related costs rise, domestic stimulus fades, and AI capital-spending growth slows.
Cyclical Continuation
The cyclical recovery could continue if it broadens across the economy and sustains the current earnings gap.
Investment approach
Contrarian Repositioning
Nuvama favours IT, private banks, chemicals, internet, consumer, pharma, and cement stocks, describing the opportunity as a possible contrarian flip.
Cyclical Continuation
Investors who continue favouring cyclical and smaller companies are relying on the recent recovery in profits and the benefits of global trade and goods consumption.
Key facts
- Brokerage view
- Nuvama Wealth Management believes the market may offer medium-term opportunities for contrarian investors.
- Main drivers
- AI capital spending, domestic stimulus, and a cyclical earnings recovery.
- Valuation pattern
- Small- and mid-cap stocks trade at a premium to large caps, while defensive stocks are cheaper than cyclicals.
- Near-term earnings risk
- Nuvama expects supply-related margin pressure to begin from Q2FY27 as inventory gains reverse.
- Domestic risks
- A poor monsoon, weak incomes, and low credit multipliers could weaken stimulus from H2FY27.
- Preferred positioning
- The brokerage is overweight large caps and defensives, including IT, private banks, chemicals, consumer, pharma, cement, and internet companies.
- Underweight positioning
- Nuvama is underweight small- and mid-caps and cyclicals, including industrials, metals, public-sector banks, power, and autos.
Quotes
Nuvama Wealth Management
Brokerage firm analyzing Indian market valuations, earnings, and sector allocation.
“Inventory gains, which prevented margin contraction in Q1FY27, will reverse from Q2FY27. Even during the 2022 war, the impact of the oil supply shock showed up with a lag. small- and mid-caps and cyclicals’ profits had a bigger dent.”
livemint.com
“The listed equities have higher exposure to goods as compared with services, further boosting India Inc.’s top-line growth at a faster pace than the economy.”
livemint.com
Sources
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