July Pulse - Sage Views - Moderation in Progress

"Risk comes from not knowing what you are doing." - Warren Buffet

Dear Investor,

Indian equities ended positive in June’25 as Nifty was up 3.1% mom; just below its all-time high of Rs 26,216 made in September’24. FII inflows continued for the fourth successive month; DII flows were also the highest in the last 5 months (Rs 727bn). Within Nifty, almost all sectors delivered positive returns; Communication Services, Materials and Energy rose the most. Both Small Cap and Mid Cap indices outperformed the Nifty 50.

Market Outlook: As we move into another earnings season, this will be the one to watch out for. Generally, the first quarter earnings are tepid. However, last year's Q1 was when the earnings started to show signs of early weakness. This quarter, we are actually going to compare it with a lower or rather fair base year over year. If we see further weakness, it will be a cause of concern. We believe from hereon earnings will be a major factor which will affect the returns to be expected from markets rather than macro-economic or geo-politics/tarrifs etc. Not that earnings were not a major factor, but we have seen other factors mentioned above being a major contributor while earnings were solid.

We mentioned in our June newsletter that markets are in a transition period and are expected to remain range-bound until we see moderation in valuations. The Nifty 200 EMA is near 24,100, which is not too far from current market levels. However, we still think valuations need to come down, especially in mid and small caps.

What should investors do?

First of all investors will need to moderate their expectations with respect to the kind of returns they have seen in the last 5 years and what to expect in the next 5. We have seen markets to perform in phases wherein some phases it will give you super normal returns and in some phases it will give you below average returns and hence expecting somewhere around 12-15% from Nifty/Sensex would be fair. The illustration below will give you an idea of long-term return averages (15 years, 5 years, 20 years) and how they have moderated over longer periods.

Asset allocation is the key: As we see a turn in the interest rate cycle, this is the last year where investors might still get a few quality NCDs/Bonds and even Corporate FD’s available at higher single-digit returns or even double-digit returns in some cases. As we see a period of moderation in valuation, a multi-asset allocation is recommended for those investors who have major allocation only in equities/pure equity MF and even for investors who have more than 50% allocation to fixed deposits/debt, yields are expected to start falling and it is advisable to allocate funds to Flexicap Funds and Multi-asset Funds. Do not fall for sectoral/thematic funds/NFOs unless there is a compelling opportunity.

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Warm Regards,

Nikhil Gupta

www.sagecapital.in