By IndiaHub 
Amid geopolitical uncertainties, slowing earnings growth, and elevated equity valuations, Ambit’s top strategists believe it’s time for a shift in asset allocation.
They recommend a 75:25 tilt in favour of bonds over equities, arguing that the current macro environment supports fixed income over risk assets.
From market volatility and the pharma sell-off to crude oil dynamics and Buffett’s latest wisdom — here’s a comprehensive look at Ambit’s market strategy for the months ahead. Edited Excerpts –
Q) The month of May started off on a volatile note with the tariff war & now India-Pakistan tensions. What is your take on markets?
A) Since 1999-2000, market returns in most instances have been positive over the next 12-months in times of conflict. Indian equity markets are usually undeterred by such events over the long-term.
As a result, we believe that markets can remain volatile due to external factors (tariff war & India-Pakistan conflict) in the near-term, but expect fundamentals i.e., earnings & GDP growth to drive returns over the long-term.
We expect markets to consolidate in the near to medium term and we expect CY25 to be a muted year from a returns perspective.
Live Events
Q) Why this sudden sell-off in the pharma space? There is some chatter after U.S. President Donald Trump signed an executive order to ramp up domestic drug manufacturing
A) The sell-off appears to be primarily due to the uncertainty around tariffs & the ability of firms to navigate this situation.We don’t expect Indian generic manufacturers to get materially impacted due to the significant arbitrage in production costs. Majority of U.S drug imports are from the EU, which is likely to be more impacted by tariff hikes.Q) May has been relatively good for bulls as Nifty closed with gains in 7 out of the last 10 years. Will FIIs on a selling spree – will we see ‘sell in May & go away’?
A) FIIs have been buyers over the past 4 weeks and inflows were broad-based in 2HApril’25, with BFSI witnessing highest inflows.
There appears to be no clear trend w.r.t FII flows in May from seasonal perspective (6 out of last 10 years witnessed inflows), hence we do not view a seasonality effect at play.
However, with earnings growth & GDP growth slowing down in 2025 and current geopolitical uncertainty, we believe FIIs could remain cautious, and flows could remain muted.
Q) What is happening with Crude oil? We are seeing some wild swings in commodities. Lower crude oil prices will help the economy. How do you see the scenario for India?
A) Both developed and emerging economies are expected to witness slowdown in GDP growth in 2025 & as a result, crude prices dropped to a 4-year low due to anticipated slowdown in global growth.
The IEA projects a well-supplied crude oil market for Apr’25-26 and our O&G analyst expects crude to trade between US$65-70/bbl over FY26-27.
India is a net energy importer as its crude oil imports account for ~85%-90% of its consumption. Hence, lower crude oil is a positive from a current account perspective.
Additionally, with crude oil expected to stay benign, WPI compression of ~100bps can lead to rise in CPI-WPI spread, as CPI is also expected to rise by ~50bps over next few months.
Historically, CPI-WPI spread >300bps (currently 129bps) has led to expansion in gross margins of corporates.
Q) What is your take on earnings and how the next few quarters are likely to pan out?
A) While India’s structural story remains intact, we are in a cyclical slowdown at the mid-cycle. Historically, Nifty’s earnings estimate trajectory used to be revised downwards each year (~8%) leading up to the financial year but earnings cuts were minimal in this cycle, which have now begun.
Accordingly, FY25 projected earnings had earlier seen an uptick, but is now beginning to normalize and we expect the trend to continue in FY26.
The earnings surprises in 3QFY25 were the worst since covid and this quarter would be seen with key interest.
The 4QFY25 reporting season does show signs of slowdown in earnings growth. For companies that have reported results so far, across large-caps (8% v/s 13% in 3QFY25) and mid-caps (9% v/s 16% in 3QFY25) aggregate earnings growth has decelerated as compared to the previous quarter, while that of small-caps is largely in-line (11% v/s 9% in 3QFY25).
We expect the slowdown in earnings growth to sustain over the next few quarters. However, expansion in CPI-WPI spread can aid in gross margin expansion which could provide some support to eps growth.
Q) It looks like we have entered a sideways market, and money-making might not be that easy. Patience and the right stock selection might be the key. Staying on cash, just like Buffett ($335 bn), is the right strategy?
A) Market breadth has been narrowing over the past few quarters, with NSE500 median stock significantly lagging index returns. This was not the case at the start of the year when the median stock outperformed the index by 200bps in 1QFY25.
Accordingly, we believe that it’s a stock-picker’s market. As market valuations continue to remain expensive, higher allocation to cash might be a prudent strategy. However, we continue to believe that a select few stocks would outperform.
Q) What is your take on the recent Warren Buffett AGM? Any learnings that you have gathered from the speech/note?
A) After leading Berkshire Hathaway for 60 years, Warren Buffett would be stepping away from day-to-day operations of the firm. As always, his speech was full of wisdom.
He emphasized the importance of emotional detachment in investing, advising against panic during market fluctuations and highlighting the role of psychology in sound investment decisions.
He highlighted the risk investors faced from the impact of climate change, especially in sectors like insurance and utilities.
Q) Equity is good, but there is some chatter on the Street that bonds might do well in the short term. What are your views? What should be the ideal asset allocation?
A) Our GRIP framework (Growth, Risk premium, Inflation and Positioning) suggests a weak outlook for equities and asset allocation in favor of bonds.
With earnings growth slowing down and valuations remaining elevated, we do not expect significant outperformance of equities over bonds.
Reduction in inflation likely led by lower food prices makes bonds more attractive, whereas risk premium is increasing due to growth slowdown.
Reduction in risk premium driven by mismatch in supply & demand of equities is set to reverse with likelihood of domestic flows coming under pressure. TTM returns of top mid-cap & small-cap schemes are likely to remain muted/negative as base hardens.
The base for Nifty trailing 12 months returns would be 24950 by July and returns can head into negative territory.
Hybrid funds should be preferred in current environment with asset allocation in favor of bonds (75%) vs equities (25%).
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)