Daily Voice: Large caps past worst of correction; mid-, small caps face more pain, says Ametra’s Karan Aggarwal

Karan Aggarwal is the CIO and Co-Founder of Ametra PMS

• Correction looks very much complete for large caps after ongoing bear phase amid Iran war-led oil risks
• Believe large cap IT is attractive cash-rich deep-in-value contra buy for investors with horizon of 6-8 years
• Strait of Hormuz blockage might not last beyond month of March 2026 as blockage impact almost every Asian country

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According to Karan Aggarwal, the CIO and Co-Founder of Ametra PMS, corrections look very much complete for large caps after the ongoing bear phase amid Iran war-led oil risks. Dip over the last 2 months has pulled valuations down to lows of April 2025, which means markets have already been sufficiently punished for weak EPS growth, he said in an interview with Moneycontrol.

However, he feels midcap and small cap space still has some pain in store are still dealing with abnormally high valuations in the range of 25x-30x.

Meanwhile, he believes large-cap IT is an attractive, cash-rich, deep-in-value contra buy for investors with a 6-8-year horizon and the appetite to average out over multiple dips over the next 12-36 months. However, any investors looking for a quick rebound might be in for disappointment, he said.

Do you think the Strait of Hormuz could trigger an energy crisis if the tensions persist for long?

There is no doubt that a blockade of the Strait of Hormuz can trigger a global economic crisis, as it accounts for nearly 20% of daily global LNG and oil transportation. If one looks at history over the last 60 years, every single energy inflation spike – be it the 1970s or early 90s or 2003-2007 or early 2020s - has been a result of a supply shock on account of geopolitical events which have happened with a remarkable regularity.

As happened in the past, if Hormuz blockage becomes a permanent feature of our lives, there would be a short-term spike in inflation around the world and the world would move on in 12—18 months, rendering this passage either redundant or designing a workaround.

Do you expect any major changes in the oil and gas supply chain, or a significant shift toward alternatives to oil and gas, if the Iran war continues for months?

Blockage might not last beyond month of March 2026 as blockage impact almost every Asian country and extended blockage might warrant a direct military participation from multiple players. Having said that, Russia might end up as big winner in case of extended blockage, it has a well-established supply chain infrastructure across Asia and Europe capable of fulfilling the shortfall at short notice. In the worst-case scenario, the US and Russia can rise as global providers of energy security.

Every oil price spike cycle sparks conversations about the search for alternatives. The harsh reality is that the transition needs massive government subsidies and financial support, which are not available, as most government treasuries around the world are dealing with excessively high debt-to-GDP ratios and the prospect of high inflation, translating into high borrowing costs in the near-to-medium term.

Do you think the market is almost done with the correction, or could we see another 5–10 percent decline from current levels?

On technical levels and to some extent on fundamental levels as well, correction looks very much complete for large caps. Dip over the last 2 months has pulled valuations down to April 2025 lows, which means markets have already been sufficiently punished for a weak EPS growth profile. However, the midcap and small-cap space still has some pain in store and is still dealing with abnormally high valuations in the 25x-30x range.

Across global markets, Asia, the US, and Europe are trading at premiums to pre-April 2025 highs. As long as global markets continue to trade at a premium to pre-April 2025 highs, Nifty 50 must hold the bottom of 22,800 with market trading in the range 22,800-24,300 for the next few weeks.

However, any bullish reversal might have to wait for moderation in valuations across the broader market and clarity on geopolitical risks related to the Iran war.

Do you rule out further interest rate cuts by the RBI’s MPC in the current calendar year?

The last energy inflation cycle in 2022 forced both the Fed and the RBI to take a hawkish stance, which remained in place for 2 years until the 2nd half of 2024. Though domestic inflation is in a comfortable territory, the RBI would like to take stock of the evolving situation in global energy markets before taking a call that might create panic in a few weeks.

RBI has already done its job to a large extent over the last 12 months by sharply cutting CRRs and repo rates, raising liquidity in the market. Any further cuts, if they happen in the next few months, would be more of a reaction to a US recession or AI-driven mass layoffs, rather than independent policy decisions.

Do you believe IT companies could soon become attractive counter buys?

Even before the AI-linked selloff at the beginning of 2026, large-cap IT companies were undergoing a long period of consolidation, with hardly any returns for investors. Industry bellwethers like Infosys and TCS are trading at a 10-20% discount to the Nifty 50. As of today, IT companies are looking at a transition from the man-hour model to an outcome-oriented model.

We do not intend to underplay AI-linked fears around IT toplines and layoffs. Still, the fact remains that there is a realistic chance that, despite nearly a 50% cut in topline, IT businesses might come out of the AI transition with fatter margins and bottom lines, driven by cost efficiencies over the next 3 years.

Large-cap IT is an attractive, cash-rich, deep-in-value contra buy for investors with a 6-8-year horizon and an appetite to average out over multiple dips over the next 12-36 months. However, any investors looking for a quick rebound might be in for disappointment.

Could defence emerge as an interesting investment theme now?

A major overhang for most defence companies is valuation. Almost the entire order book has already been priced into the present price levels. On the other hand, the delivery and growth track record of defence plays has been underwhelming, with average EPS growth in the mid-single digits over the last 5 years, which is not very attractive considering that most stocks are trading at valuations of 50x or more.

Negative probabilities, such as order rejections, order cancellations, and failure to deliver, are not yet priced, which makes the risk/return proposition quite unattractive.

Unless defence companies can demonstrate their execution capabilities, it will always remain a theme defined by sentiment rather than fundamentals.

Which sectors would you prefer to buy during the ongoing correction?

We prefer to focus on sectors that are not closely tied to discretionary consumption and white-collar spending trends. Our focus is on selective buying in FMCG, IT, Power and Pharma sectors. Additionally, as and when opportunities arise, we would increase our exposure to capital goods and the infrastructure sector.