Synopsis
Selectivity over speed: navigating a market shaped by external risks
India's domestic story remains intact. Q1 FY27 GDP grew 7.8%, supported by investment and resilient demand. Private companies accounted for about 90% of new projects announced in the quarter, and new investment pools are emerging in semiconductors, data centres, aerospace and space. External buffers are healthy: forex reserves stand near US$780 bn and the current account deficit is expected below 1.5%.
The near-term picture, however, is increasingly set by forces outside India. Middle East tensions pushed India's crude basket to about US$114/bbl in September. US long-end yields are approaching multi-decade highs, and the Fed has resumed tightening. Domestically, inflation is broadening: over 25% of the CPI basket now runs above 6%, against about 10% in January. Markets are pricing 25–50 bps of RBI tightening by February 2027.
Equity markets have absorbed much of this. Indian equities have been largely flat to negative over two years, and FII ownership has fallen to a 13-year low. Large-cap valuations now sit below their –1 SD forward P/E band. Midcaps are below their long-term mean, but smallcaps remain near +1 SD. With Q2 FY27 margins the key test, we believe returns will come from earnings delivery rather than re-rating.
Our positioning
In equities, the Spark Investment Guidance Committee remains marginally constructive but more selective. We favour staggered deployment and high-active-share, bottom-up strategies across three groups: quality compounders, sector-rotation approaches, and domestic cyclicals. We remain constructive on SMIDs over the medium term, but manager selection, liquidity and valuation discipline are critical.
In fixed income, accrual remains the core. We prefer high-quality short-to-medium-duration strategies and are gradually dialling down long-duration exposure, with tactical opportunities if the 10-year yield spikes above ~7.25%. We remain selectively constructive on private credit, income-oriented REITs/InvITs and hybrid "debt-plus" strategies. Gold remains a strategic allocation despite near-term headwinds from Fed tightening.
