Shetty pointed out that the recent market correction, coupled with the earnings season, has brought down valuations by nearly 10%, creating investment opportunities. “We continue to maintain large allocations in financials, especially private sector banks. These high-quality banks have missed most of the rally in recent years, and their valuations are close to 20-year lows. This makes them very attractive from a long-term perspective,” he said.
He added that consumer discretionary stocks, particularly automobiles, have performed well over the past three years. However, given their strong run, valuations now look stretched. “We are trimming our positions in autos. Incremental allocations are not advised here,” he noted.
Shetty also highlighted selective opportunities in logistics and pharmaceuticals. According to him, several companies in these sectors have faced short-term challenges that dragged valuations down. “If you look at them with a three- to four-year horizon, they can deliver around 15–16% CAGR returns, which matches our long-term investment target,” he explained.
Risks in the broader markets
At the same time, Shetty cautioned that the broader market is not without risks. Geopolitical tensions and strained India–US relations could impact capital flows into the country. “The US remains the largest pool of global capital. If relations deteriorate further, there is a chance of US institutions reducing investments in India. This could hurt valuations and market stability,” he warned.
Looking ahead to the festive season, Shetty said that while it always provides a short-term consumption boost, the real game-changer would be any reduction in GST rates. “If auto GST rates are cut, it could expand the market for certain categories and act as a structural driver for the sector,” he said.
Among sectors, Shetty said IT services look most promising after facing corrections earlier this year. “We have added to IT over the past six months. With signs of discretionary spending picking up, this sector is likely to see a re-rating and can offer significant returns over the next 12 months,” he added.
Avoid capital goods and consumer staples stocks
In contrast, Shetty remains cautious on capital goods despite the recent momentum. “Valuations in capital goods are already at levels last seen in 2006–07, but demand is nowhere close to that cycle. Even if demand improves, stocks in this sector are already pricing in a best-case scenario. Any disappointment could lead to sharp corrections,” he cautioned.
Similarly, consumer staples remain an avoid in Shetty’s strategy. “For over 13 years, we have stayed away from this sector. Valuations of 70–80 times earnings for companies growing at single digits are simply not justifiable,” he explained.
On precious metals, Shetty said that gold is benefiting from global uncertainty as central banks continue to park surpluses in safe assets. Silver, meanwhile, is supported by both industrial and investment demand, particularly in Europe where defence spending is rising. However, he does not see them as core allocations for equity investors at present.
The pharma sector and IT, according to Shetty, also serve as natural hedges in a portfolio. “When the rupee depreciates, exporters like pharma and IT initially gain, though clients eventually adjust contracts to factor this in. It’s not a structural driver but helps balance portfolios in times of currency volatility,” he said.
On India’s ambitions in the semiconductor space, Shetty remained cautious. He acknowledged government efforts but noted that most announcements so far are limited to chip assembly and packaging, which are low-value activities. “The real value lies in chip fabrication, but that requires huge capital investment which India is not yet ready for. Current initiatives are focused on simpler chips and early-stage projects. It’s too early for investors to take big bets here,” he remarked.
Summing up, Shetty said the markets are currently balanced between strong fundamentals and significant risks. “Bottom-up valuations are attractive in some sectors, but global flows and geopolitics remain uncertain. Investors must be selective, focus on value, and keep a long-term view,” he concluded.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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