Indian equity markets are increasingly worried about macroeconomic risks rather than domestic corporate fundamentals, as elevated crude oil prices, a weakening rupee and rising bond yields weigh on investor sentiment, according to Manish Sonthalia, Director and Chief Investment Officer at Emkay Investment Managers Ltd.
Speaking to NDTV Profit, Sonthalia said domestic economic indicators and corporate earnings remain healthy, with recent results from information technology and banking companies showing no significant signs of stress. However, persistent geopolitical tensions and crude oil prices approaching $110 per barrel are increasing concerns about India's macroeconomic outlook.
“Markets are more worried about macros than micros at this given point in time,” Sonthalia said, highlighting the potential impact of higher interest rates and rising government bond yields on equity valuations.
India's 10-year government security yield has moved closer to 7.43%, while expectations of further rate increases over the next 12 months are pushing up the equity risk premium, he said.
Midcaps And Smallcaps May See Buying Interest Return
Despite recent corrections in midcap and smallcap stocks, Sonthalia believes investor interest could return once near-term volatility subsides. He pointed out that systematic investment plan (SIP) inflows remain strong in these segments, indicating continued retail investor participation.
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He cautioned against equating volatility with overvaluation, arguing that valuations should be assessed alongside earnings growth.
Among large-cap stocks, information technology and banking companies appear attractive, given their relatively beaten-down valuations. While IT stocks have rebounded around 22-23% from their lows, banks have not witnessed a similar recovery.
Rising Bond Yields Pose Risks For Banks
Sonthalia warned that rising bond yields could hurt banks through mark-to-market losses on treasury portfolios. Public sector banks, which generally hold larger treasury portfolios, could face greater pressure if yields rise further.
However, he noted that public sector banks have performed relatively better than private lenders in defending net interest margins in the second quarter.
Consumption: Stock Selection Remains Key
On consumption, Sonthalia expects growth to be driven more by value than volumes, reflecting price increases and changes in product mix. While certain discretionary categories could deliver stronger growth, he sees limited opportunities in the staples segment and favours selective stock picking over a broad-based sectoral approach.
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