Crude, US yields, and valuations: Where DSP MF sees opportunities in Indian markets

Indian equity markets are navigating multiple challenges, from elevated crude oil prices and geopolitical tensions to rising US bond yields, foreign capital outflow, and concerns over valuations. In an interaction with BT, Abhishek Singh, Senior Vice President and Fund Manager at DSP Mutual Fund, discusses the outlook for corporate earnings, banking stocks and consumption sectors. He also shares his investment strategy, preferred sectors, and the key factors investors should consider when selecting stocks.

Q). With crude oil prices remaining high and geopolitical tensions rising, how could India's markets and corporate earnings be affected? Which sectors are better placed to handle these challenges?

Abhishek Singh: Since India imports most of its crude, an oil shock reaches us through the related channels of inflation, interest rates, currency, and margins. While we have already seen some impact on interest rates and the currency, corporate margins still face some risk and will likely feel the pressure in the current quarter.

Even so, earnings growth expectations remain strong, in the mid-to-high teens for large caps, and even higher for mid- and small caps. When we do a bottom-up aggregation, at least as of now, we do not see a significant risk to overall earnings in the large cap space.

Exporters are obviously better placed in this environment. However, since geopolitics and stretched crude prices remain headwinds for global growth, they still have an impact, and a resolution is ultimately what is needed.

Q). Banking stocks are facing pressure from weak deposit growth and margin concerns. Do you see a recovery ahead, and where are the best opportunities in the financial sector?

Singh: As per the Bloomberg data on Index returns (TRI) as of October 21, 2026, Bank Nifty has outperformed the Nifty on every timeframe from one to five years and has delivered returns like the NSE 500 index as well. So, the first point is that the banking sector has not underperformed for investors, even if some individual banks have.

As far as deposit growth is concerned, deposits are never a constraint over a sustained period because credit growth itself creates deposits, and central banks can always step in to help create more, just as the RBI did recently. While the nature of these deposits can change, if it changes for everyone, the competitive position remains the same—and it is ultimately the competitive position that determines returns.

I remain positive on the space. The best franchises are currently attractively priced. While I underestimated the extent of the challenges in certain individual companies, even in those cases we might be at the tail end of the pain period. Looking ahead, insurance and even certain capital market-related names could do well over the medium term from here.

Q). Small- and mid-cap stocks have seen a correction in recent months. Have valuations become attractive, or should investors remain cautious and prefer large caps?

Singh: In reality, small- and mid-cap stocks have barely seen any correction, and on most valuation metrics, they remain expensive compared to history. Meanwhile, the top 100 large-cap companies now make up close to 57% of the overall listed market cap, which is the lowest share ever.

The real debate is whether the higher growth we are building into the small- and mid-cap space will continue. If it does, then these valuations are probably justified. Still, looking across different subsegments, I feel we are giving peak-ish multiples to peak-ish earnings and margins in many cases, which means we need to be far more risk-aware here.

Q). High inflation and slower growth could affect consumer spending. Which consumption sectors offer the best investment opportunities over the next two to three years?

Singh: We have seen periods of far higher inflation in the past where consumer spending has still held up. What truly impacts spending growth is a consumer's earnings growth, along with their expectations of future growth. Right now, wage growth has been lagging revenue growth for listed companies, and this is a problem since consumer leverage has also gone up.

Given that autos are trading close to or below the levels they were at last year before they got the GST rate cuts, that is one segment that could do well. Especially since there is a lot of negative sentiment currently priced in around lower margin expectations due to higher commodity prices.

Q). US bond yields have been rising, making dollar assets more attractive. Could this lead to further FII outflows from Indian equities, and how might it affect market valuations?

Singh:  Higher yields are not good for equity valuations; as Buffett said, they act as gravity for stock markets. At the same time, FIIs have already sold a lot, and net flows eventually do not impact valuations since they are zero every day in the markets.

More than FIIs, what can sour sentiment incrementally is if domestic flows begin to soften. After all, if markets stay at these levels for another six months, the three-year returns even in the small- and mid-cap categories will drop to the mid-single digits.

Q). What key factors do you look at when selecting stocks? In the current market, should investors focus more on earnings growth, valuations, or balance sheet strength?

Singh: What does the business earn on its capital through a full cycle? Does the profit turn into cash? Does management allocate capital well, and is it paid for returns rather than size? How does a bear, base and bull case look like? These are some of the questions I ask. Our job, I believe, is not to buy the best business or the best balance sheet or highest growth. It is to buy the best risk-reward. Hence, price is extremely important.

Q). Where do you see the best investment opportunities in the Indian equity market over the next 12–18 months? Which sectors or market segments should investors avoid?

Singh: Investors should at the very least think in three- to five-year buckets. With that horizon in mind, large caps look attractive right now, along with some interest-rate sensitives—more in terms of sentiment and less in actual business impact—like real estate. Utilities are also attractive and defensive, and I like financials and autos as well. On the other hand, I would avoid many segments in industrials, data centers, and manufacturing-related names, where there still seems to be a lot of euphoria.