Why DSP Mutual Fund's Sahil Kapoor now sees a contrarian call on equities

large-caps.In an interaction with Mint, Sahil Kapoor, head-products and markets strategist, DSP Mutual Fund, explains why he believes the current setup offers a contrarian opportunity.We recently put out an ad hoc update, which is quite rare for us. The trigger was that markets had hit several extremes at the same time.A number of private banks, IT companies, some FMCG names and housing finance firms, were trading at valuations last seen during the global financial crisis. Many others were at or below their long-term average valuations.

Together, this segment makes up roughly 50% of the market.At these levels, investors can build a portfolio with a potential return on equity profile of 15–16% or more, while paying valuation multiples of around 17 times or lower. This is happening at a time when earnings growth itself is quite subdued at about 8–10%, which makes the opportunity even more compelling.At the same time, several market indicators are showing extreme readings. Only a small proportion of stocks are trading above their 200-day and 50-day moving averages, and macro indicators such as the balance of payments are also weak.

When you see such a combination of valuation comfort and pessimistic signals, it creates for a contrarian opportunity. That is why we are now recommending an increase in equity exposure, particularly in large-caps.Oil is one variable that nobody can predict with certainty. Over the years, we’ve seen prices behave in ways that were completely unexpected, including turning negative at one point.