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PL Asset Management, the asset management arm of PL Capital Group - Prabhudas Lilladher, one of India’s most trusted financial services organisations, has released its latest ‘PMS Strategy Updates and Insights’ report. The report states that the current volatility has created a long-term buying opportunity in the stock market. Due to the current correction, the percentage of large-cap, mid-cap, and small-cap stocks above their 3-year average P/E is declining, suggesting a normalisation of valuations driven by weak market sentiment and soft earnings performance. This, in turn, has led to an upward change in the earnings yield and bond yield spread, making equities relatively more attractive.

The report also states that between 2006 to now, there have been frequent occurrences of drawdowns, both minor (less than 10%) and more significant (greater than 10%), states the report. Despite these fluctuations, equity markets have demonstrated a strong upward trend over the long term. This pattern emphasises the resilience of the market, where temporary declines are eventually followed by recoveries and further growth. Staying invested through volatility is thus the key to capturing this growth.

Quant Market Monitor

Market dynamics are reflecting a volatile and transitional phase, with no clear winner amongst the factors, viz. Low Volatility, Momentum, Quality and Value which all fell more than 10% with Value falling the most at ~13% over the past 3 months. The report states that this broad-based decline across styles highlights the ongoing market adjustment, as investors navigate elevated valuations, cyclical corrections, and softer earnings growth. While no single style has emerged as a clear leader, this phase presents opportunities for additional deployment and potential rebound in cyclical and higher beta stocks.

Large-cap stocks are currently outperforming small-caps, reflecting a market preference for stability. This trend highlights cautious investor sentiment and a lower risk appetite.

Meanwhile, institutional investors have also pivoted towards larger-cap stocks amid rising geopolitical tensions, economic uncertainty, and a continuing market correction, as reflected in the narrowing 1-year return spread between Nifty Equal Weight and Nifty 500 indices.

Indian markets witnessed notable fluctuations in December 2024, driven by the Fed’s 25 basis points rate cut, the rupee hitting an all-time low against the dollar, persistent global uncertainties, and inflationary pressures, keeping investors cautious. Foreign portfolio investors (FPIs) recorded a net outflow of approximately ?17,000 crore, continuing their selling trend as the appreciating dollar weighed on the rupee.

According to the report, Nifty Small Cap 250 was the best performing style factor performance for December 2024. Healthcare sector led the sector performance for December 2024 at 5.84%, followed by Pharma sector at 5.27%.

AQUA Performance

In December, AQUA delivered a strong return of 0.67%, outperforming the benchmark, which declined by 1.5%. Since the June rebalance, PL’s quantitative models have emphasised a quality and low-volatility strategy, effectively minimising downside risk and aligning with broader market trends.

Following the October rebalance, 65% of the portfolio remains concentrated in non-cyclical sectors like Healthcare, IT, and Consumer Goods, while exposure to the auto sector has been trimmed. Additionally, a 13% allocation in defensive financials has been retained to lower portfolio beta and manage rising volatility.

AQUA is India’s pioneering style-adaptive and style-agnostic strategy, engineered for sustainable and granular alpha generation across market cycles. Since inception, AQUA has delivered an annualised return of 42%, outperforming the benchmark, which has gained 25.3% over the same period.

Mr. Siddharth Vora, Head - Quant Investment Strategies & Fund Manager, PL Asset Management, Executive Director, PL Capital Group - Prabhudas Lilladher said, “The outperformance of the Value style factor ended around the day of the General Election results, and since then, Quality style has been outperforming. AQUA’s shift away from a value-momentum approach since the June 2024 rebalance has helped reduced portfolio volatility. Broader markets have entered correction territory since October, declining from record highs amid muted corporate earnings and sustained foreign outflows. But our models have captured a declining trend in broad market underperformance, which reflects that markets may be nearing a reversal zone from current levels.”

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