Ride the rally or play it safe? Motilal Oswal’s Siddhartha Khemka on navigating markets amid global uncertainty

Indian stock markets have surged smartly from recent lows and are now nearing all-time highs, many investors are wondering — is this the right time to invest more, or should they be cautious? Global uncertainty, rising interest rates, and ongoing geopolitical tensions are adding to the confusion. In an insightful interaction with Business Today, Siddhartha Khemka, Head of Research – Wealth Management at Motilal Oswal Financial Services, explains his views on India’s current market valuations, optimal investment strategies, sector outlook, and navigating the road ahead amid macro volatility. Edited excerpts:

How do you view the current market valuations in India — are we in an overvalued zone or is there still room for growth?

The Nifty is trading at a 12-month forward P/E ratio of 21.5x, near its long-period average (LPA) of 20.6x, indicating a comfortable valuation. After growing by 4% in FY25, we expect the Nifty earnings per share (EPS) to grow 10% & 15% in FY26/FY27.

We believe that there is room for upside in Nifty driven by strong earnings visibility, macro resilience (stable inflation and potential RBI rate cuts), and structural growth tailwinds. We can expect a further upside if earnings momentum continues and global conditions stabilize with the interim India-US trade agreement expected soon.

In a volatile macro environment, what’s your preferred asset allocation strategy for an Rs 50 lakh portfolio today?

In a volatile market environment, asset quality matters more than timing. Stick with earnings-backed stories, avoid speculative corners, and stay diversified across market-cap segments with a preference towards large-caps. This would balance risk, return, and liquidity while ensuring capital preservation. One can allocate funds in the below manner: Large-Cap: 60-70% and Mid and Small Cap: 30-40%. This allocation balances growth potential with risk mitigation, considering current market valuations and macroeconomic scenario.

Which sectors or themes do you believe are best positioned to outperform over the next 3–5 years?

The Indian market’s outperformance over the next 3-5 years is likely be led by domestic-facing themes such as BFSI, Capital Markets, Consumption, EMS, and Defence.

Banking, Financial Services, and Insurance (BFSI): We expect the systemic credit growth will sustain at 11-12% YoY for FY26E (similar to FY25 levels) with lenders prioritizing asset quality amid tighter underwriting and higher risk aversion. Corporate lending is being driven by demand for working capital and policy-linked sectors. We believe that the visibility of earnings recovery for banks and margin tailwinds for NBFCs as the sector pivots back to growth — supported by valuations — will provide attractive investment opportunities over the year.

Consumption: Both urban and rural demand trends are expected to improve, supported by income tax benefits announced in the Union budget, interest rate cuts, and an overall strong domestic macro environment along with a rise in discretionary spending.

Industrials: India’s industrials and manufacturing sector is witnessing strong tailwinds, supported by government initiatives like PLI schemes, Make in India, and a renewed focus on infrastructure and capex-led growth. A combination of rising domestic demand, supply chain diversification (China+1 strategy), and increasing private sector participation is driving capacity expansion across key segments such as capital goods, engineering, and auto components amongst others.

Capital Markets: We expect a gradual recovery in volumes along with increased retail participation, to support the ongoing growth trajectory for Indian capital markets. We believe the entire ecosystem of AMCs, Brokers, Exchanges, Intermediaries, and Wealth Managers will see sustained revenue growth of 17-45% CAGR over FY24 27.

EMS: The EMS sector is experiencing significant growth with India emerging as a preferred destination for electronics manufacturing. EMS companies are witnessing strong order inflows and onboarding new clients across various industries, indicating high visibility of future growth.

Defence: India’s defence sector is poised for long-term growth, driven by strong policy support for indigenization, rising capital allocations, and a clear push towards self-reliance under the Atmanirbhar Bharat initiative. With increasing domestic procurement, robust order books for key players, growing export opportunities, and greater private sector participation, the sector offers structural tailwinds.

Do you think now is a good time for lump-sum investments or should investors consider SIP/STP routes?

Given the current market environment marked by global and macroeconomic uncertainty, investors may find it prudent to adopt a staggered approach through SIPs or STPs. This strategy offers a disciplined, risk-adjusted entry into the market by averaging investment costs over time, thereby reducing timing risk.

It also helps manage emotional biases, promotes long-term participation, and provides a cushion against sudden market corrections. Compared to lump-sum investments, SIPs/STPs can be especially effective in volatile phases, making them a sensible choice for navigating the present landscape.

How should a long-term investor balance between large-cap stability and mid/small-cap growth in the current market?

In the current Indian market scenario, long-term investors should adopt a balanced approach by anchoring their portfolio with 60-70% in large-cap stocks for stability, proven performance, and downside protection, while allocating 30-40% to high-quality mid and small-cap stocks to capture higher growth potential. Given the recent sharp rally in mid/small-caps, selective and staggered deployment is crucial, with a strong focus on fundamentals and valuation discipline. Structural growth drivers like BFSI, manufacturing/industrials, digitalization, and consumption themes support this mix, but regular rebalancing and risk monitoring is essential to navigate volatility and sustain long-term returns.

What’s your advice on managing downside risk while still aiming for wealth creation?

In volatile markets, managing downside risk becomes important to protect capital while continuing to build long-term wealth. Investors may consider diversifying across asset classes and market capitalizations to spread risk more effectively. Adopting phased investment strategies like SIPs or STPs can help navigate market fluctuations with discipline.

Emphasizing high-quality companies with strong earnings visibility adds resilience to the portfolio. Additionally, maintaining a tactical allocation to cash or liquid assets can provide flexibility during market corrections. Regular portfolio reviews and rebalancing further ensure alignment with evolving market conditions and investment goals.

What is your outlook for Indian stock markets?

Indian equities have bounced back smartly, with Nifty50 up nearly 4.5% YTD, regaining earlier losses. We expect India to maintain strong economic momentum, with FY26 GDP growth forecast at 6.2–6.4%, driven by manufacturing, services PMI, and infrastructure investments.

Inflation has moderated to 3.2% (April 2025) — the lowest since July 2019 — creating room for possible RBI rate cuts in June 2025. While global cues remain mixed, progress on India-US and UK trade agreements, and a recovery in corporate earnings, support a positive medium- to long-term outlook.

In the near term, the market may consolidate with a heightened sector rotation and stock-specific action, we believe the medium to long-term growth narrative for India remains positive.