Daily Voice: Rational Asset Management CIO flags deeper mid-, small- and micro-cap selling, sees oil above $100 through the decade

Vivek Iyer expects crude above $100 a barrel for the rest of the decade. "A ceasefire takes the war premium out of the barrel, not a decade of underinvestment. A market cannot see a V-shaped recovery on falling estimates," he said. Do you expect bears to intensify their selling in midcap, smallcap and microcap stocks, given their elevated valuations and lack of alignment with earnings growth? Yes, and last week's fall is the start, not the end.

The earnings have been strong: midcap profits grew over 30 percent in FY26 and about 20 percent in the June quarter. But those numbers were earned with crude at $70 to $90 a barrel, GST cuts in the base, and commodity tailwinds, and the multiples paid for them assume that run-rate continues. Brent is now at $117, and the mid and smallcap universe is where the input cost lands first: domestic cyclicals, consumer discretionary, chemicals, autos, with less pricing power than the large caps and more of the margin exposed.

The forward estimates have not been cut yet, and the broader market is still trading 50 to 70 percent above its historical premium to the Sensex on those estimates. Foreign investors sold Rs 48,000 crore in October from the names they can exit; the broader market is owned by domestic money, which is why it fell last and is falling now. The selling continues until the estimates come down and the multiples meet them, and that does not happen in a week.

Do you believe a V-shaped market recovery is unlikely, even if the prevailing concerns begin to ease? A V needs the cause of the fall to reverse, and the cause is oil. Brent is at $117, and India imports close to 90 percent of its crude. On our numbers, every $10 above $90 is taking 3 to 4 percent off Nifty earnings growth, and the street is still underwriting double-digit FY27 growth. We expect crude above $100 for the rest of the decade.

A ceasefire takes the war premium out of the barrel, not a decade of underinvestment. A market cannot V on falling estimates. We expect a long base, large caps first and the broader market last. What do you expect from the US Federal Reserve at its October policy meeting? A hold at 3.75 to 4 percent, with language that keeps December open. For India, the decision matters less than the yield. With the US 10-year above 5 percent and the rupee at 96, a dollar investor is earning more risk-free than the Nifty's earnings yield, and FPI selling is arithmetic on that hurdle rate.

The Fed only matters to India when the 10-year comes down, and a central bank that is still talking about hikes is not bringing it down this year. How do you assess the likely impact of the US midterm elections next month on financial markets and investor sentiment? Not a material event for India. Democrats are favoured to take the House, markets have priced gridlock, and gridlock changes nothing in the earnings.

The only channel that matters is oil, and an administration under pressure on petrol prices can clip the war premium, not the level. We expect crude above $100 for the rest of the decade, whoever holds Congress. We are not positioning for the election. Do power companies offer strong earnings visibility at reasonable valuations? We like the sector, not the price. Peak demand is heading to 277 GW this year, and the capacity has to be built, so the earnings are coming.

But the sector as a whole has re-rated sharply, generators, renewable developers and the capital goods and transmission companies that capture the capex alike, and we are unable to find any cheap pockets in it. Have you started favouring IT services companies that are reporting growth driven by AI-related revenue? No. AI revenue is growing 20 to 30 percent a quarter at the top three while total revenue is growing 1 to 2 percent, which means the non-AI book is shrinking.

Infosys cut guidance to 1 to 2 percent in the same quarter, AI crossed 10 percent of revenue, and said why: clients are taking the productivity back in price. Net deflation on the base book is running at 3 to 4 percent a year. Margins are expanding on that productivity and the rupee, but nobody has converted it into growth. The sector is cheap against its own history for a reason that has not finished playing out.

We look again when aggregate organic growth turns. Do you expect the government to introduce significant policy changes to revive market sentiment and boost economic growth amid rising external risks? The RBI has already acted, with the dollar window for oil companies and the rupee measures. Fiscally, the government is constrained by the same barrel. Every $10 a barrel on crude adds about 0.4 percent of GDP to the import bill, and a consumption stimulus on top of that widens the current account with the rupee at 96.

Expect targeted moves, an excise adjustment on fuel and front-loaded capex, not a package. The government is protecting the macro and the consumer, and the cost is landing on corporate margins. That is the policy, and it is already in place.