Reading the Market Signals: Motilal Oswal Private Wealth Favours Hybrid and Large Caps
* Maintains a Neutral stance on equities but increases allocation to Hybrid/Large Caps to 50%, reducing Mid & Small Caps to 40%, while retaining 10% allocation to Global Equities.
* Nifty 50 valuations fall to 17.2x forward earnings, around 18% below the 10-year average, while Q2FY27 earnings are expected to grow 27% YoY, the highest in 17 quarters.
* Rising crude prices, elevated global bond yields and persistent FII outflows weigh on sentiment, even as domestic institutional flows continue to cushion the correction.
Motilal Oswal Private Wealth’s latest Alpha Strategist report, titled “The Yellow Signal,” highlights a market environment where improving earnings prospects and more reasonable large-cap valuations offer opportunities, even as elevated global bond yields, high crude oil prices and geopolitical uncertainty call for greater investment caution. While domestic institutional flows continue to cushion the impact of persistent foreign investor outflows, the report advocates a more measured approach to equity allocation, with an increased preference for Hybrid and Large Cap strategies.
Indian equities witnessed a sharp correction in September, with the Nifty 50 declining 6.1% to 22,620, marking its second consecutive monthly fall. The decline came amid persistent global uncertainty, Brent crude prices remaining above USD 100 per barrel and rising global bond yields. Foreign institutional investors recorded net equity outflows of USD 4.1 billion during the month, while domestic institutional investors invested USD 8 billion, helping cushion the impact of foreign selling.
Despite near-term volatility, the earnings outlook offers grounds for cautious optimism. Nifty 50 earnings are expected to grow 27% year-on-year in Q2FY27, the strongest growth in 17 quarters. At the same time, the Nifty 50’s 12-month forward price-to-earnings multiple has declined to 17.2x, around 18% below its 10-year average of 20.9x. However, valuations remain relatively elevated in small caps, reinforcing the case for greater selectivity in equity allocation.
Ashish Shanker, MD & CEO, Motilal Oswal Private Wealth, said: “Indian equities therefore appear to be at a ‘Yellow Signal’ - not a reason to stop, but a signal to proceed with greater caution. Reasonable valuations provide the seat belt, improving earnings provide the fuel, while elevated yields, crude prices and geopolitical uncertainty remain the cross-traffic or speed breakers.”
In fixed income, the report notes that the Reserve Bank of India’s October policy signals a shift towards calibrated tightening, with the repo rate raised by 25 basis points to 5.50%. Against the backdrop of persistent inflationary pressures and elevated yields, the report expects a further 50 basis points of tightening, taking the repo rate to 6.00% by mid-2027. It continues to favour accrual-oriented strategies over duration, with 55–60% of fixed-income allocation directed towards private credit strategies, high-yield non-convertible debentures and income-generating assets such as InvITs. Arbitrage funds and Hybrid SIFs remain relevant options within liquid alternatives.
Gold prices corrected in September amid rising US bond yields and a stronger dollar, even as global gold ETF inflows remained strong and central-bank purchases continued. The report maintains a Neutral view on Gold as it continues to merit allocation given elevated geopolitical risks, fiscal concerns and sustained central-bank demand. Further, recent correction has put it at an important support level as well.
Sandipan Roy, CIO, Motilal Oswal Private Wealth, said: “The current market calls for a balance between improving fundamentals and the risks emerging from the global environment. While higher crude prices, elevated bond yields and persistent foreign outflows may keep markets volatile, the earnings outlook is showing encouraging signs of recovery. With the Nifty 50 trading meaningfully below its historical valuation average, the opportunity is increasingly about positioning portfolios with discipline rather than making broad-based allocation calls. We are therefore increasing our preference for Hybrid and Large Cap strategies, while retaining exposure to Mid and Small Caps and using a staggered approach for further equity deployment. In fixed income, we continue to favour accrual strategies, while gold remains an important allocation amid geopolitical and fiscal uncertainty.”
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