ETMarkets Smart Talk | Financials, IT turn attractive; microfinance seen as turnaround bet: Niraj Kumar

In an interaction with Kshitij Anand of ETMarkets, Niraj Kumar, Chief Investment Officer at Generali Central Life Insurance, highlighted that financials and IT services have turned attractive from a risk-reward perspective, with several stocks trading at compelling valuations.

He also pointed to microfinance as a key turnaround play, supported by improving credit cycles after a period of stress.

While near-term uncertainties linked to global geopolitics persist, Kumar believes investors with a medium-term horizon can benefit by positioning in sectors with earnings visibility and structural growth tailwinds. Edited Excerpts –

Q) Thanks for taking the time out. FY26 returns have turned negative due to geopolitical concerns around West Asia. How do you sum up the financial year?A) FY26 was largely a year of consolidation for the markets. It began on a strong note, with multiple growth stimulants starting to translate into economic activity.Fiscal measures such as income tax and GST cuts, accommodative monetary policy through repo rate reductions and ample liquidity, and regulatory support including the deferral of ECL and Project Finance guidelines had begun to show tangible impact.

Markets reflected this optimism, with the Nifty rising ~7% and the Midcap Index gaining ~15% till end February.

However, the escalation of the West Asian conflict triggered a sharp risk off phase in March. India’s dependence on energy imports, resulting macro pressures, and relatively lower appeal for global capital—amid slower earnings growth, elevated valuations, and limited AI led narratives—led to a steep correction, with the Nifty declining ~11% in March alone.

That said, broader markets displayed relative resilience. Overall, FY26 concluded on a softer note, with the Nifty down ~5%, while the Nifty Midcap 100 delivered modest positive returns of ~2%.Looking ahead, history suggests that markets often rebound meaningfully once geopolitical conflicts stabilise. As clarity emerges on the West Asian situation, there is a reasonable case for a sharper recovery, setting the stage for a more constructive and rewarding FY27.Q) As we head towards FY27, what are the key triggers investors should keep in mind for a market reversal or return of bullish sentiment?A) We remain constructive on FY27. After nearly two years of time and price correction, the risk reward for Indian equities has turned favourable.While domestic fundamentals were improving and sentiment had strengthened post the Indo US trade agreement, geopolitical developments have temporarily dampened confidence.

The most immediate trigger for a market reversal would be de escalation in the West Asian conflict, particularly a ceasefire or diplomatic resolution between the US and Iran.

Beyond geopolitics, markets will closely track Q4 earnings and management commentary, especially around the resilience of growth despite recent disruptions. Sectors and companies offering visibility on earnings recovery are likely to be rewarded.

Q) Which sectors should be on investors’ radar for FY27?A) We advocate a diversified portfolio approach. Financials remain a key focus area—across banks and NBFCs—where concerns around LPG/LNG disruptions impacting growth and asset quality have led to sharp derating.

Several stocks are now trading below COVID era valuation troughs. While near term earnings risks exist, we do not equate the current environment to COVID, and valuations offer a compelling margin of safety with meaningful upside potential.

Within lending, Microfinance stands out as a turnaround opportunity. After an 18 month period of borrower stress driven by excess leverage, the inherently short credit cycle suggests we are closer to recovery.

We also like non lending financials such as asset managers, brokers, and exchanges, which benefit from strong structural growth themes.

Post the recent correction, we have turned overweight on IT services. Market concerns around AI disruptions overlook the sector’s strong historical record of adapting to technology shifts.

AI led enterprise adoption will require large scale implementation, integration, and customization—areas where IT services companies are indispensable.

Valuations are now attractive, with mid teen multiples and 5–6% free cash flow yields, implying near zero terminal growth assumptions.

We also remain positive on domestic cyclical sectors including Power and Capital Goods, supported by the energy transition theme, and Materials—particularly Cement and Metals.

Q) How should one approach gold and silver in the new financial year?A) Gold continues to serve as a strategic hedge against inflation and currency debasement and should remain part of a core portfolio.

However, investors should recognise that gold typically moves in phases—periods of consolidation followed by sharp upswings, often during geopolitical stress.

The recent correction in gold prices appears driven by temporary factors such as weaker Middle East demand and central bank selling to defend currencies amid geopolitical tensions. We view this pullback as an opportunity to rebalance allocations toward gold.

Silver, on the other hand, is largely an industrial metal. While supply deficits exist, higher prices often lead to demand substitution. Given this dynamic, we do not see silver as a preferred long term portfolio allocation.

Q) How are we positioned against peers in terms of valuations?A) India continues to trade at a premium to both developed and emerging market peers. The Nifty 50’s valuation premium versus the MSCI EM Index remains around ~40%, slightly below long-term averages.

While this premium has narrowed, global flows have favoured markets such as South Korea, Taiwan, and Brazil, driven by strong AI led or commodity linked earnings growth.

It is important to recognise why India has historically commanded a valuation premium: the longevity of growth driven by favorable demographics and rising discretionary consumption, and the breadth of investible opportunities, with nearly 500 companies exceeding USD 1 billion in market capitalization.

In contrast, many EM peers have highly concentrated indices. Consequently, while Indian valuations may appear optically expensive, we expect the structural premium to persist.Q) Will FII flows reverse in FY27? How do you interpret domestic and global flows?A) Capital flows ultimately follow returns and economic outlook. India’s underperformance versus both developed and emerging market peers over the past few years—driven by high starting valuations, slower earnings growth, and limited AI led drivers—had led to sustained FII outflows.

Importantly, just ahead of the West Asian conflict, foreign flows had begun to improve, reflecting growing comfort on valuations and a nascent recovery in earnings expectations.

The escalation of geopolitical tensions temporarily disrupted this improving trend. However, following the recent correction, the Nifty 50’s 12-month forward PE has moderated to ~17.5x, below its long-term average.

Even under conservative assumptions of flat earnings growth, valuations are now broadly in line with post COVID norms. While near term volatility may persist, the balance of risks has become increasingly favourable.

As geopolitical conditions stabilise, we believe FII flows could recover sharply, supported by India’s strong structural growth, improving earnings visibility, and attractive valuations. This phase therefore calls for investment managers to proactively position portfolios with a medium-term perspective, recognising that global economies will ultimately need to collaborate to resolve the conflict.

In the interim, strong and resilient domestic liquidity continues to provide a powerful backstop and reinforces confidence in the market’s underlying strength.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)