Indian Markets Show Signs of Recovery on Solid Macro Fundamentals: PL Asset Management

Mumbai, June 17, 2025: According to PL Asset Management, the asset management arm of PL Capital Group (Prabhudas Lilladher) ‘PMS Strategy Updates and Insights’ report, Indian markets posted modest gains relative to global peers, with strong breadth as mid and small caps outperformed, driven by robust gains in cyclical sectors, especially defense. The report highlights India’s ongoing macroeconomic strength, with robust tax collections, easing inflation, strong PMI performance, and rising foreign exchange reserves supporting the country’s growth trajectory.

The Indian equity markets, despite moderate gains in large-caps, saw clear signs of recovery in May. Large-Caps delivered modest gains, with the Nifty 50 up 1.7% to near 24,800 amid selective buying and profit booking in IT and financials. In contrast, Mid and Small-Caps outperformed, with the Nifty Midcap 150 up 6.5% and Smallcap 250 rising 9.5%, driven by retail flows and cyclical rotation on improving domestic data.

PL Asset Management highlights broader market participation in May, as the Nifty 50 Equal Weight rose 2.31%, Nifty 500 gained 3.5%, and the Nifty 500 Equal Weight Index surged 8.5%, led by strong consumer stocks. A widening 1M–12M outperformance spread and a rising share of stocks near 52-week highs underscore a broadening upswing.

Valuations firmed as Nifty’s PE rose to 22.3x and PB to 3.6x, reflecting price catch-up. While mid- and small-cap valuations stayed above 5-year medians, they remained within 1-year bands, suggesting normalization. Over 50% of mid- and small-caps now trade above their 5-year average PEs, while large-cap valuations remain earnings-aligned.

Quality, Momentum, and High Beta Drive May Gains as Factor Spreads Recover

According to PL Asset Management, May month witnessed a notable divergence in style and size performance. Quality names delivered strong returns on the back of robust earnings, while risk-on segments like momentum and high-beta outperformed. The Nifty 500 Equal-Weight Index rallied 8.5%, significantly outperforming the Nifty 500’s 3.5%, underscoring improving market breadth. Momentum (+5%) & High-Beta (+8%) indices rose, driven by sectoral shifts, though their long-term performance remains muted. Quality gained +8.5% as investors favored on strong earnings and safe-haven buying, while low-volatility stocks posted +2.1% gains, both factors leading 12-month returns. Value (+3%) and dividend yield (+2%) strategies saw modest gains, as preference skewed toward quality and growth amid mixed earnings. Meanwhile, the Nifty 500 Equal-Weight Index (+8.5%) and Small Caps (+9.6%) outperformed over large & mid-cap and market-cap weighted indices, reflecting improving market breadth and rising retail participation.

Sectors, where Strength Showed

Defense (+22%): Mid-May fighting and war-like tensions between Ind-Pak reignited investor interest as the sector delivered stellar returns in the month.
Media (+13%): Ad budgets jumped 18% month-on-month as renewed consumer spending drove a surge in TV viewership and digital engagement, translating into robust earnings growth for broadcasters and OTT platforms.
Metals (+7.1%): Easing trade tensions, deals and heightened domestic demand alongside rebound in global economic activity underpinned gains in steel and aluminum producers.
Realty (+7.2%): RBI’s accommodative stance and expectations of further rate cuts boosted realty – although still lagging on a 12m basis (-7%), May’s rally may indicate a turnaround for the sector.
PSU Banks (+6.6%): Improved asset quality and the prospect of easier monetary policy fueled a steady uptick in public-sector lender stocks.

Where Cracks Appeared

FMCG (–2.1%): Unseasonal rains dampened discretionary consumption softening volumes as higher valuation premiums sparked selective profit-taking in staples.
Pharmaceuticals (–1.6%) & Healthcare (–1.2%): Heightened regulatory scrutiny and mounting pricing pressures narrowed margin outlooks for leading drugmakers, as investors moved from defensive sectors into cyclicals
Tourism (–0.6%): Geopolitical jitters and war-like tensions alongside rising travel costs curbed bookings, dampening investor interest in the sector.
Financial Services (0.0%): Heavy corporate bond issuances (₹500 billion in May) and block-deal volatility offset the institutional and retail inflows as the sector also saw selective profit-booking post March-April rally

Macroeconomic Outlook

The rupee strengthened to ₹85.35/USD on robust FPI flows, while forex reserves rose to $692.72 billion, ensuring solid external stability.
In Retail & Institutional equities flows, April saw record SIP inflows of ₹26,632 crore; consequently, DII investments totalled ₹67,642 cr for the month of May, lifting YTD DII inflows to a record ₹2.90 lakh cr. Mid-May uncertainty, a temporary U.S.–China truce, and China’s rate cuts prompted FPIs to withdraw ₹10,016 cr on May 20 after ₹23,778 cr of inflows, yet they ended May as net buyers totaling ₹11,773 cr

AQUA Performance

AQUA delivered a 3.8% return in May, outperforming its benchmark’s 3.5% gain. The strategy rebalanced toward cyclicals with increased exposure to Materials and Industrials while trimming defensives. Large-cap exposure was reduced to ~48%, mid-caps rose to ~34%, and cash allocation increased to 7.3% for added flexibility. AQUA’s dynamic factor model leaned towards Low Volatility and rising Momentum exposure. Since inception, AQUA has delivered a 24.9% annualized return, surpassing the benchmark’s 20.7%.

Mr. Siddharth Vora, Head – Quant Investment Strategies & Fund Manager, PL Asset Management and Executive Director, PL Capital – Prabhudas Lilladher said, “India’s resilient macroeconomic landscape, coupled with improving global sentiment, presents a constructive backdrop for equity investors. AQUA’s adaptive quant approach continues to navigate this evolving environment by dynamically aligning with sectoral and factor trends to optimize risk-adjusted returns.”