Market volatility ahead? Waterfield's Vipul Bhowar on sectors, valuations & what to buy

Time of India

5 days ago

In a year marked by global trade tensions, delayed Fed rate cuts, and domestic uncertainties, investors are looking for clarity and conviction. To decode the current market mood and the road ahead,
ET Markets
spoke with
Vipul Bhowar
, Senior Director & Head of Equities at Waterfield Advisors.
From the shifting portfolio strategies of HNIs and family offices to the outlook on mid and smallcaps, Bhowar offers deep insights on how earnings, sector rotations, and alternative investments are shaping capital allocation in 2025.
Excerpts:
Equity Market Outlook: Volatility or opportunity?
Q. A lot is happening in the markets - geopolitical tensions, trade tariff concerns, and domestic triggers. Is the recent correction a sign of deeper volatility?
Vipul Bhowar:
Equity markets follow earnings. The recent volatility stems from an earnings slowdown. But in our investable universe of ~5,000 companies, we still see double-digit earnings growth. That's why markets recovered in March–May. The RBI's interest rate cut also helped, lowering the cost of capital while earnings improved.
However, the new 25% tariffs (up from 10%) could introduce sector-specific volatility. But markets rarely fall twice for the same reason. If earnings continue to grow YoY, which current trends suggest, the market should hold. Volatility will likely remain limited to a few sectors.
Portfolio Shifts: How HNIs & family offices are allocating
Q. How are wealthy investors shifting exposure across asset classes?
Vipul Bhowar:
Three years ago, portfolios were typically split 50:50 between equity and fixed income, with equities skewed towards large caps. Today, we're seeing a 70:30 split, tilted more towards equities and quasi-equity products like REITs and InvITs.
The non-equity bucket is where most changes are happening. Investors are increasingly allocating capital to equity or near-equity instruments, and this trend continues.
Midcaps, smallcaps & sector rotation: What's overheated?
Q. Are midcaps overheated? Where is the smart money moving?
Vipul:
On valuation averages, yes, midcaps look expensive. But balance sheets are the cleanest we've seen in 25+ years, especially in terms of median debt-to-equity. Most capex is happening in mid and smallcap sectors like energy and real estate — not large caps.
So while midcaps may look expensive at first glance, the underlying growth and capex justify current valuations. That said, the broad-based rally in mid and smallcaps is done. Going forward, expect stock- and sector-specific moves.
FIIs, fed cuts & global cues
Q. FIIs have pulled out Rs 26,000–Rs 27,000 crore in just 10 days. Why the exodus?
Vipul:
While FIIs are selling in the secondary market, they're active in the primary market, especially IPOs. They're exiting old economy stocks growing at nominal GDP and reallocating to sectors showing higher growth.
As for the Fed, recent US job data points to an economic slowdown. Earlier, the chance of a September rate cut was 41%. That's now risen to 80–90%. If rate cuts happen, FIIs will return to emerging markets like India.
Rise of alternative investments: AIFs, private credit & more
Neha:
How are Indian investors responding to alternative investment products?
Vipul:
Investor behavior has changed significantly. We've created a "growth pool", ~10% of portfolios, comprising private equity, venture debt, and private credit. Clients are willing to lock in capital for 10 years in exchange for higher returns.
This 10% is now under discussion; many want to raise it to 15%. We're also allocating to pre-IPOs, unlisted opportunities, and high-yield strategies. With fixed income less attractive, interest in these strategies is rising.
How to invest in the remainder of 2025
Q. We're in the second half of 2025. What's your advice for new investors? What should they expect?
Vipul:
Entry valuations are high, market cap to GDP is at 130% versus the 20-year average of 90%. Don't expect 25% CAGR like in the past five years.
We suggest deploying capital in tranches over 6 months. For FY26, Nifty EPS is expected at Rs 1,200 — implying fair value of ~24,000 at 20x PE. For FY27, assuming Rs 1,300 EPS, Nifty could be ~26,000. Markets are trading in this expected range.
Maintain a mix of large, mid, and smallcap based on your risk profile. Allocate more to largecaps and balance the rest accordingly.
Sectors to Watch: Themes within themes
Q. Which sectors look promising?
Vipul:
We're seeing strength in 'sectors within sectors.' For example:
Financials:
Lending is consolidating, but non-lending plays, insurance, capital markets, are performing well.
Tech:
Traditional IT is slow, but digital tech (e.g. Swiggy, Eternal) is growing.
Healthcare:
Pharma has uncertainties, but hospitals are doing well.
Real Estate Ancillaries:
Real estate stocks have rallied, now we like ancillaries, electric goods, branded electronics, and defence.
These pockets are showing consistent double-digit growth and merit capital allocation.
Q. Is this a 'buy-the-dip' market? Any caution for investors?
Vipul:
Yes, buy the dip works but take a long-term view. Don't chase YoY returns. Markets are consolidating after a big rally, which is healthy. Keep deploying capital, participate in volatility, and avoid reacting emotionally to short-term swings.