Banking, defence, IPOs: Mirae Asset Sharekhan's Somil Mehta shares investment strategy

Indian equities have navigated a volatile phase marked by geopolitical tensions, fluctuating commodity prices and global macro uncertainties. Yet, domestic fundamentals continue to offer reasons for optimism. In an interaction with Business Today, Somil Mehta, Head of Retail Research at Mirae Asset Sharekhan, shares his outlook on market direction, large-caps versus broader markets, sectoral opportunities, IPO valuations, asset allocation strategies and the key themes investors should track over the next few years.

BT: After the recent volatility, where do you see Indian markets heading over the next 6-12 months, and what are the biggest triggers investors should watch?

Mehta: Indian markets are likely to remain volatile in the near term due to geopolitical tensions, elevated crude oil prices, and global growth concerns. However, over the next 6-12 months, we remain constructive on Indian equities given strong domestic fundamentals, healthy corporate balance sheets, and continued domestic liquidity. Key triggers to watch include crude oil prices, inflation trajectory, RBI policy actions, FII flows, monsoon progress, and developments in the US-Iran-Israel conflict. Any easing in geopolitical tensions could significantly improve investor sentiment.

BT: Broader markets have significantly outperformed in recent years. Do you still see value in mid- and small-caps, or is it time for investors to shift towards large-cap stocks?

Mehta: While selective opportunities remain in the mid- and small-cap space, valuations in several pockets continue to remain elevated. Given the current uncertain environment, we prefer large-cap companies with strong balance sheets, earnings visibility, and reasonable valuations. Investors should be selective rather than taking broad exposure to the mid- and small-cap segments.
 

BT: Which sectors are best positioned to outperform over the next two to three years, and which sectors would you avoid at current valuations?

Mehta: We remain positive on banking & financials, defence, capital goods, infrastructure and pharma. These sectors are supported by strong earnings visibility, government spending, and structural growth drivers. We remain cautious on pockets of the broader market where valuations have run ahead of fundamentals, particularly certain mid-cap and thematic segments that have witnessed excessive optimism.

BT: India's IPO market remains very active despite global uncertainties. Are current IPO valuations justified, and how should retail investors separate quality businesses from listing-gain stories?

Mehta: The IPO market has remained strong due to abundant liquidity and investor participation. However, not all IPO valuations are justified. Investors should focus on business quality, profitability, cash flows, management credibility, and growth visibility rather than short-term listing gains. An IPO should be evaluated like any other investment opportunity, not as a trading event.
 

BT: How could movements in crude oil, metals, interest rates and geopolitical tensions impact Indian equities in the coming quarters?

Mehta: Crude oil remains the biggest variable for India. Sustained high oil prices can impact inflation, the current account deficit, the rupee, and corporate margins. Rising global interest rates or geopolitical tensions can lead to FII outflows and increased volatility. Metal prices can impact sectors such as infrastructure, automobiles, and capital goods. Overall, commodity and geopolitical developments will continue to influence market sentiment and earnings expectations.
 

BT: If you had to back one market theme for the next three to five years—manufacturing, defence, financials, consumption, renewables, technology or another sector—which would it be and why? What will be your top picks from that space?

Mehta: Our preferred long-term theme remains Financials, particularly private sector banks and select financial services companies. India's credit growth cycle remains healthy, balance sheets are strong, and financial penetration continues to increase. We also remain constructive on Defence due to rising indigenisation and government spending. Preferred ideas include ICICI Bank, HDFC Bank, SBI, Bajaj Finance, and Bharat Electronics.
 

BT: If an investor had fresh capital to deploy today, how would you allocate it across large-caps, mid-caps, small-caps, debt, gold and international assets? What are your top 6-10 picks across all the market segments?

Mehta: For a balanced investor, we would allocate 50 per cent to large-cap equities, 15per cent to mid-caps, 5 per cent to small-caps, 15 per cent to debt, 10 per cent to gold, and 5 per cent to international assets.

The current environment favours quality and diversification. Our preferred stock ideas include HDFC Bank, ICICI Bank, Larsen & Toubro, Bharat Electronics, Sun Pharma, SBI, Reliance Industries, Bharti Airtel, Trent, and ABB India. Investors should continue deploying capital gradually through a staggered approach rather than making lump-sum investments.