Large caps best bet in VUCA environment, says Future Generali India Life’s Niraj Kumar | Stock Market News

The recent recovery suggests that markets may have found some floor even as risks from global uncertainties and tariff war persist, but investors would do better to stick to large caps amid volatility, according to Niraj Kumar, chief investment officer at Future Generali India Life Insurance.

“The prevalent VUCA (volatility, uncertainty, complexity, ambiguity) environment will continue to pose bouts of volatility,” said Kumar.

Still, Kumar believes US President Donald Trump’s reciprocal tariffs won’t have a lasting impact on Indian trade and markets. He remains “constructive on the markets” in the medium term.

Excerpts from the interview:

The markets seemed to have recovered from 4 March lows. Do you think we have bottomed out?

Prima facie, the recent recovery in markets from the March 4th low (21,964.60) suggests that markets may have found some floor, as it seems to be cognizant of the broader economy having bottomed out. The recovery has been supported by strong domestic liquidity, interest rate cut, contained inflation, a pick-up in government capex, liquidity injection by RBI (Reserve Bank of India), arrest in FPI (foreign portfolio investor) outflows and robust retail participation.

You expect FPI outflows to reverse?

Global uncertainties such as tariff wars, US Fed policy and geopolitical risks will continue to pose bouts of volatility. A few global factors such as the reduction in QT (quantitative tightening) announced by the Fed, lower crude oil prices and the softening of the dollar index as well as global market volatility are to some extent supportive for FPI flows to return into Indian markets.

The upcoming earnings season will indeed be a crucial watch for markets, as it would set the narrative for FY26 earnings expectations. At the outset, we reckon the major domestic pivots taken in terms of supportive monetary and fiscal policy stance and favourable regulatory stance would manifest in the earnings growth in the ensuing quarters.

Are markets pricing in influencing factors such as reciprocal tariffs, Q4 earnings and monetary policy outcomes?

While Indian markets may be posed with a slew of impending events which may have positive or negative ramifications, we reckon the markets are partly pricing in the outcomes. At the outset, while imposition of reciprocal tariffs will be perceived negatively by the market, we do not believe it is likely to have a lasting long-term impact on India-US trade. India is doing all it can to mitigate the impact of tariffs through active engagement with the U.S. A potential India-US trade deal may eventually iron out some of the issues around tariffs and market access on both sides. Meanwhile, liquidity easing by the RBI has been generally supportive of the market. We expect to see continued easing of rates by the RBI at its April meeting on the back of benign inflation and yet sluggish growth. Continued easing will likely be viewed positively by markets. With respect to Q4 earnings season, it will be crucial from a market standpoint as better results, particularly in banking and industrials/capital goods, could provide positive momentum, while global headwinds may weigh on IT and export-driven sectors. Also, the forward-looking commentary would be important as it will give a perspective on the FY26 earnings growth.

There is a feeling that valuations, after the correction from September end to early March, have turned reasonable for large- and small-caps, while mid-caps remain expensive. Which cap is good to cost average currently and what sectors do you find promising?

The composition of Nifty50 has changed significantly over the last five years, with low valuations of old-economy stocks getting replaced by highly valued consumer stocks. In this context, we find valuations at 18XFY27 EPS (earnings per share) reasonable. Had the constituents remained the same as they were in 2020, the valuations would have come down to below 17X, which would be well below the historical averages.

With respect to the valuations in the mid- and small-cap space, while there were indeed pockets of valuation excesses, historical comparison in PE is not the right way of looking at valuations in small- and mid-cap space owing to structural improvement in the earnings profile of the small- and mid-cap companies with rising ROE (returns on equity) and declining leverage ratios. This would reduce the risks associated with small- and mid-cap space and, hence, warrant a higher PE multiple. While valuations have corrected across the board, we believe it would be safest to stay with large caps, and a selective approach must be the mantra for making mid- and small-cap investments. From a sectoral standpoint, domestic-facing sectors such as banking, auto, cement and cap goods would remain our preferred picks.

On a one-year window, portfolios are probably making losses. What is the change you see in the retail investor of today versus five years ago, given this volatility?

Clearly, there is a palpable difference in today’s retail investors vis-à-vis that five years ago. Retail investors are more informed, resilient, and have a long-term focus compared to what they were five years ago. The rise of SIPs has encouraged a disciplined approach to investing, reducing panic-driven selling during market corrections. There is also a noticeable shift towards direct equity participation beyond just mutual funds. Moreover, with increased financial literacy, retail investors are more willing to buy on dips rather than exit in fear. However, a rising interest in F&O trading among retail investors has added short-term volatility to the markets and is a potential risk.

Your take on the Indian IT outsourcing model, given the strides being made in AI.

We believe the advent of AI will be transformative not just for the Indian IT industry but for how businesses operate. While one may see challenges for the traditional Indian IT outsourcing model, the fact is that AI-driven automation and transformation are likely to open new avenues of business. The way Indian IT firms are actively adapting by investing in AI, one shouldn’t be surprised if AI-driven solutions drive the next leg of growth for IT.

If the US tariffs hit China, countries such as ours will see a surfeit of cheap imports. How will this impact Indian businesses? Do you think India will impose anti-dumping duty to preclude this?

US tariffs on China and other countries will bring with it a lot of disruption in global supply chains and trade. We believe this can have two implications for India: one, that of opportunities, and the other of challenges. US tariffs on China, Mexico, and Canada are likely to provide India with an opportunity to bridge the gap rendered by the disruption in existing trade arrangements of these countries. On the challenges front, a trade war could lead to the dumping of Chinese products into India, especially given the massive capacities across most industries in China.

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This could indeed put pressure on domestic manufacturers, leading to price erosion and margin compression. In such a scenario, it would be fair to assume that the government would want to take a protectionist stance and introduce anti-dumping duties in economically sensitive sectors to safeguard domestic industries from excessive competition.

Do you expect markets to hit fresh records or see it rangebound for the next year or so?

The markets will likely remain rangebound in the near term due to global uncertainties such as the tariff war, the US Fed’s policy stance and other geopolitical developments. However, in the medium term, we remain constructive on the markets and expect them to march higher, driven by the revival in corporate earnings, stability in the geopolitical situation, and continued domestic policy support, along with a turnaround in FPI flows. Having said that, the prevalent VUCA (volatility, uncertainty, complexity, ambiguity) environment will continue to pose bouts of volatility.

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