Sensex erases US-Iran war losses, rises nearly 12% in just 10 sessions: What should your investment strategy be?

Some experts suggest the possibility of pullbacks of 3-5% as the market digests oil, Fed and geopolitical news.

BSE Sensex has risen by a whopping 8,600 points in the last ten trading sessions – an increase of 11.8%! That’s a remarkable feat for a stock market that has been out of favour by most standards globally this year.Sensex and Nifty are back at their highest levels since 27 February, which was the last trading day before the US-Iran war began on 28 February.There has been a sudden turnaround in sentiment since late October and Indian equities have seen a series of upgrades in the last few days from global brokerages as well.What’s brought this about? And importantly, what should your strategy be as an investor? Which sectors will be in focus going forward? We ask experts:

The reasons behind the rally

The recovery in Indian equities has been driven by easing geopolitical concerns, a sharp correction in crude oil prices, a notable reversal in FII flows and decent corporate earnings reported in the second quarter. The US-midterm blow for the Trump administration has strengthened hopes of a swift end to the war with Iran.The crude prices dropped sharply and with easing geopolitical tension the war premium in crude is likely to go down. This is particularly positive for India as it eases inflationary pressures, supports the rupee and improves the current account position.Additionally, global investors are reassessing their exposure to expensive US technology and artificial intelligence stocks and diversifying towards emerging markets, including India.

Brent crude prices have fallen sharply

Resilient domestic economic activity and improving corporate earnings have further supported investor sentiment.There are also hopes that the government may announce relief from long-term capital gains tax in the coming months, another positive that is drawing foreign investors’ interest.VK Vijayakumar, Chief Investment strategist, Geojit Investments Limited lists important reasons:1.⁠ ⁠Weakening of the AI trade after the US mid-term elections. This is positive for India which is a non-AI trade.2. ⁠The impressive Q2 results which have come much better than expected. The near 24 % earnings growth of Nifty 50 companies is a 12-quarter high.3.⁠ ⁠⁠The above two factors have turned FIIs aggressive buyers in India with a buy figure of Rs 53,170 crore in November, so far. The rally is being led by largecaps which are fairly valued.

The sustainability

Some experts suggest the possibility of pullbacks of 3-5% as the market digests oil, Fed and geopolitical news. They advise staggering flow of fresh money over the next few months.Somil Mehta, Head of Retail Research at Mirae Asset Sharekhan says that the sustainability of this rally will depend on whether corporate earnings improve and global uncertainties continue to ease. Any fresh rise in crude oil prices or geopolitical tensions could lead to volatility.But, experts believe the medium-term outlook remains constructive, but some consolidation and intermittent volatility cannot be ruled out after the sharp recovery.“One needs to understand that the market has seen two years and time correction and hence we would not be surprised if benchmark indices soon hit their record highs. The valuations have become more reasonable following the earlier correction backed by double digit EPS growth over next 2-3 years,” explains Sunny Agrawal, Head – Fundamental Research at SBI Securities.

What should you do?

The next big question in the minds of investors is: is it time to reassess and adjust their investment strategy? Does their portfolio require a fresh look and if yes, what are the money pockets to invest in?According to experts, in the short term, investors should avoid chasing the rally and use market volatility to gradually accumulate quality stocks.Sunny Agrawal says that investors holding underperforming companies with weak outlooks may use this opportunity to exit, while quality stocks should be retained.“The focus should remain on quality-led rebalancing rather than aggressive portfolio restructuring. Investors should consider reducing exposure to expensive stocks where valuations have outpaced earnings, increasing allocation towards quality businesses with sustainable growth prospects, and diversifying excessive sector concentration,” he tells TOI.According to him, the next phase of wealth creation is likely to be driven more by company-specific earnings growth than by a broad-based market re-rating.“We prefer businesses delivering sustainable 15–20% earnings growth at reasonable valuations, backed by strong balance sheets and credible management execution,” he says.SBI Securities’ expert recommends maintaining a largecap-oriented portfolio while selectively increasing exposure to quality midcaps and smallcaps.“Long-term investors should focus on businesses benefiting from structural growth opportunities, particularly domestic capex, manufacturing, consumption, electrification and infrastructure development etc,” he says.“Largecaps offer relatively valuation supported by earnings visibility and stability, while midcaps provide opportunities for higher earnings growth and alpha generation. Smallcaps should be approached cautiously, focusing on companies with consistent revenue growth, ROCE above 15%, manageable debt, strong cash flows and sound corporate governance,” he adds.Tanvi Kanchan observes that on days when the Sensex rallied 2-2.5%, the smallcap index barely moved or in fact even fell!“Large-caps offer the best combination of reasonable valuations and earnings visibility. Investors with a long term equity portfolio can look at allocation to large caps in 50%-55% which becomes the core of the portfolio,” she tells TOI.“Midcaps offer selective opportunities where earnings growth is strong, smallcaps, one would be cautious. They have lagged this rally, valuations in many pockets are still stretched relative to earnings, and they are the most vulnerable if foreign flows reverse. A good MF allocation can include large and midcap categories to balance between two composite market caps,” she advises.

And finally, what sectors should investors focus on?

From a sector perspective, Somil Mehta, Head of Retail Research at Mirae Asset Sharekhan remains positive on banking, automobiles, healthcare, infrastructure and select consumer companies.Tanvi Kanchan recommends financials, especially large private banks, autos, which just posted record October sales, and aviation and select consumption names where input costs fall with oil, and a contrarian position in Indian IT, which is drawing renewed interest as an alternative to global AI hardware stocks, though volatility there will stay high.Sunny Agrawal of SBI Securities advises focus on auto, banks, capital market themes (wealth management, exchanges, stock broking, intermediaries), capital goods, specialty metals and metal products, consumption, electrical equipment, wires and cables, and industrial automation remain attractive, supported by the investment cycle in infrastructure, electrification, and digital capacity.“Defence and aerospace manufacturing also offer long-term opportunities, although valuations warrant monitoring. Pharmaceuticals and select auto component manufacturers are other preferred areas. Investors should remain selective in chemicals, FMCG, and real estate, where earnings visibility and valuations vary across companies,” he says.Tanvi Kanchan concludes by saying that in the long term, the case for Indian equities is intact, and arguably stronger than it was in February.Corporate earnings are recovering, valuations are more reasonable than in 2024, and India has shown it can attract foreign capital even in a volatile world.“Investors should keep SIPs running regardless of market levels. This is exactly when discipline pays, because the investors who stopped SIPs in March, at the bottom, missed this recovery. So yes, it is a good time to review portfolios, but not to make dramatic changes. Readjust towards quality, rebalance where allocation has drifted, keep some liquidity for corrections for averaging inflows,” she says.(Disclaimer: Recommendations and views on the stock market, or any other asset classes or personal finance management tips given by experts and analysts are their own. These opinions do not represent the views of The Times of India.)