Asset Allocation Compass
| Asset Class | Our View | Commentary |
| Equity | Neutral – Bias Positive | Bottom-up opportunities still exist. Follow 60:20:20 when it comes to large, mid and smallcap allocation. It’s a buy-on-dip market. |
| Debt | Overweight | A barbell approach is prudent — blending select long-duration exposure with 2–3-year high-quality accrual strategies. |
| Gold & Silver | Positive | Suggested to buy on the dip. Maintain it as a strategic allocation. |
| Real Estate | Negative | Opting for investments through REITs and realty stocks might be the favorable choice. |
| International Equities | Netural | Maintain it as a strategic allocation; avoid going overweight. Tactically positive on China. |
| Investment Ideas For FY26 | 1.Defence
2.China 3.Capital Markets |
Suggested to be part of satellite portfolio. Allocation: 5-10%, Staggered deployment recommended. |
Equity Market Outlook: Reclaiming Stability, Refocusing On Growth
Macro Tailwinds: Volatility Abating, Policy Visibility High
- Geopolitical risk has receded post-Operation Sindoor; India-Pak border tensions have eased and US tariff risks are paused — easing investor anxiety.
- Inflation prints continue to surprise on the downside (June CPI at 2.1%), offering scope for accommodative policy. The RBI has frontloaded 100 bps of easing.
- India stands out globally with a stable currency, strong reserves, and monetary flexibility — supporting a sustained growth narrative.
Domestic Drivers: Investment Cycle Broadens
- Public capex momentum remains robust (₹2.2T in Apr–May), and FY26 project completions are projected at ₹9.7T — 48% higher than the 5-year average.
- Private capex is accelerating, led by sectors like defence, renewables, real estate, and data centres.
- A strong rabi harvest and early kharif sowing (+11% YoY) are boosting rural optimism and discretionary spend potential.
Earnings Momentum & Structural Themes
- Broad-based Q4FY25 earnings beat: Led by BFSI, pharma, durables, capital goods.
- Multi-year themes: Defence, power capex, and Make-in-India playbooks gaining steam.
- High-frequency indicators are stabilizing, supported by resilient urban and improving rural demand.
Market Structure: Gradual Rotation Unfolding
- Largecaps seeing return of flows after extended underperformance — valuation comfort remains.
- Small/Midcaps remain elevated vs. historical averages; froth is easing but bottom-up quality filters are critical.
- Leadership may shift towards sectors with operating leverage, stronger balance sheets, and policy tailwinds.
Sector Outlook: Favoring Domestic Plays Amid Global Uncertainty
| Sector | Outlook | Rationale | Preferred Positioning |
| Financials | Positive | Credit growth strong, asset quality stable, margin tailwinds from lower rates. | Overweight large private banks and diversified NBFCs. |
| Capital Goods & Industrials | Positive | Beneficiaries of rising public & private capex; defence orders gaining traction. | Overweight PSUs like HAL, BEL, and execution-focused EPCs. |
| Healthcare | Positive | Hospital occupancy rising, pharma growth visible in both US specialty and domestic. | Overweight hospitals specialty pharma. |
| Telecom | Positive | ARPU improving, sector moving toward profitability. | Prefer leaders; integrated telcos with 5G monetization. |
| Consumer Discretionary | Selective | Urban premium demand robust, supportive macros (tax cuts + low inflation). | Focus on autos, QSRs, durables with brand and pricing strength. |
| Consumer Staples | Neutral | Margins improving with raw material relief; rural volume recovery still weak. | Hold core names with pricing power and rural exposure. |
| IT Services | Cautious | Deal wins muted, margin pressure visible; client spending under scrutiny. | Stay underweight; monitor H2 outlook for potential re-entry. |
| Metals & Commodities | Tactical | Global pricing soft, China slowdown impact visible; pick only balance sheet-strong names. | Tactical exposure to low-cost producers with deleveraged balance sheets. |
| Auto & Ancillaries | Tactical | Tractor and 2W demand to benefit from rural rebound; EV pipeline builds long-term case. | Prefer OEMs with EV focus and rural demand recovery levers. |
Fixed Income Outlook: Favoring Accrual, Tapping Duration Selectively
Macro Backdrop & Policy Stance
✓ India’s bond market is in a constructive zone, underpinned by macro stability and easing inflation.
✓ Headline CPI has dropped to 2.1%, well below RBI’s 4% target, allowing policy space to stay accommodative.
✓ RBI has frontloaded 100 bps of repo rate cuts and initiated CRR reductions, signaling a shift to growth support.
✓ With a neutral stance now in place, the focus is on transmission while liquidity remains comfortably in surplus.
✓ Global central banks are pausing or cutting rates, softening global yields and supporting EM bond flows.
Key Drivers Supporting the Market
✓ Short-end hardening: RBI’s VRRR auctions are absorbing surplus liquidity, nudging up short-end rates and CP-CD yields.
✓ Stable INR, strong fiscal start: Dollar weakness and disciplined fiscal spending have kept the rupee and bond spreads resilient.
✓ Attractive carry at the front end: Higher short-end yields combined with system liquidity make accrual strategies compelling.
✓ FPI flows remain mixed, but India’s impending inclusion in global bond indices should offer medium-term support.
Yield & Duration Outlook
✓ Short-end hardening: RBI’s VRRR auctions are absorbing surplus liquidity, nudging up short-end rates and CP-CD yields.
✓ Stable INR, strong fiscal start: Dollar weakness and disciplined fiscal spending have kept the rupee and bond spreads resilient.
✓ Attractive carry at the front end: Higher short-end yields combined with system liquidity make accrual strategies compelling.
✓ FPI flows remain mixed, but India’s impending inclusion in global bond indices should offer medium-term support.
Strategy View: Accrual Core, Duration Through Dynamic Bond Funds
✓ Maintain a carry-oriented bias via short-to-medium duration funds focused on quality corporate bonds and SDLs.
✓ Use dynamic bond funds to express duration exposure selectively, depending on evolving macro signals.
✓ Stay invested in high-credit-quality instruments; avoid reaching for yield in low-rated or illiquid names.
✓ Stagger allocations to duration strategies; rate transmission will likely play out gradually in H2FY25.
