Light at end of tunnel for Indian markets, says Aditya Kondawar; recommends gradual deployment in mid and smallcaps

Aditya Kondawar, Partner and Vice President at Complete Circle Capital, believes Indian markets are approaching an inflection point after 15 months of volatility, with the upcoming free trade agreement (FTA) with EU on January 27 and Union Budget on February 1 serving as potential catalysts for recovery.

In an interview with ET Now, Kondawar recommended investors begin deploying cash reserves systematically, characterizing current market pessimism as an opportunity rather than a warning signal. However, he emphasized a gradual, disciplined approach rather than aggressive bottom-fishing.

Deployment strategy: Systematic over emotional

For investors holding liquid funds, Kondawar outlined a measured deployment plan:

Immediate Action:

• Deploy 20% of liquid fund allocation immediately (4% of total portfolio)
• Establish 5-8 month STP (Systematic Transfer Plan) from liquid to equity funds
• Focus remaining deployment on mid and smallcaps over largecaps

Rationale for gradual approach:

"From the last 6-9 months we have seen value picks getting more valuer... that is why at this point of time we do not want to deploy everything at one go," Kondawar explained, noting that systematic deployment prevents emotion-based decisions.

Mid and smallcaps: The primary focus

Despite three to six months of volatility in smaller capitalization stocks, Kondawar sees the segment as particularly attractive. He noted that earnings have remained strong even as stock prices declined, creating favorable entry points for the next two to three quarters.

For retail investors without time or expertise, equity mutual fund SIPs remain the recommended "autopilot mode" investment strategy. For those seeking active involvement, Kondawar identified specific sectoral opportunities.

Top sector picks for 2026

Financial services: Deal-making momentum

The financial sector has witnessed significant activity, with India's largest FDI deals closing weekly.

Kondawar highlighted:

• Smaller banks showing aggressive growth with advance-based growth exceeding deposit growth
• Strong institutional interest signaling sector confidence
• Technical strength supporting fundamental improvements

Auto and auto ancillaries: Shifting dynamics

The auto sector shows diverging trends that savvy investors can exploit:

• Passenger vehicle segment expected to slow over next 2-3 quarters
• Two-wheelers and commercial vehicles poised for acceleration
• Companies reporting strong earnings with favorable technical chart patterns

Recycling: Negative operating leverage creates value

Kondawar identified recycling companies as compelling opportunities:

• Stocks down 30-50% from recent highs
• Companies undertaking significant capex during downturn
• Currently experiencing negative operating leverage that will reverse when new capacities come online
• Attractive valuations for patient investors

Electronics manufacturing services (EMS): Structural growth story

While Complete Circle Capital hasn't taken positions yet, Kondawar acknowledged the EMS sector's strategic importance for India's economy and export competitiveness, suggesting it warrants investor attention.

Market sentiment: Exaggerated negativity

Addressing recent stock-specific corrections like Paytm (down on ₹128 crore EBITDA impact) and IIFL Finance, Kondawar argued that negative reactions are exaggerated relative to actual business impact.

"We live in pessimistic times. Everybody is running headlines that lakhs of crores of investor wealth has been wiped," he said, invoking Howard Marks' pendulum analogy. "Markets swing between euphoria and panic. Right now we are at the other end where everything is in a state of panic."

Paytm: Sentiment over substance

Kondawar dismissed Paytm's selloff as primarily sentiment-driven, noting that back-of-envelope calculations suggest a 10% increase in Soundbox charges (from ₹100 to ₹110) would more than offset the PDIF-related hit to bottom line.

Broader market attack: Multi-asset pressure

Kondawar characterized current conditions as a "bear attack from all sides":

• Currency depreciation
• Commodity pressure
• Equity stock declines
• Bond yield stress

Despite this coordinated pressure, he urged investors to maintain faith: "Investing is like a Mumbai road, it is full of potholes... this is a part of the process. Just be patient and keep the faith in the Indian market."

Investment product recommendations

For mutual fund investors:

• Small and midcap funds
• Balanced advantage funds for conservative exposure
• Equity SIPs for disciplined, long-term wealth creation

For direct equity investors:

• Tactical bets in oversold mid and smallcaps
• Focus on technically strong sectors with earnings visibility
• Patience for 2-3 quarter averaging period

EU FTA and budget catalysts

Kondawar specifically highlighted two near-term events that could provide market support:

1. January 27 EU FTA: Expected to boost sentiment and potentially benefit export-oriented sectors
2. February 1 Union Budget: Key sectors likely to receive policy focus, creating sector-specific opportunities

Risk management in uncertain times

Acknowledging ongoing geopolitical uncertainty and the difficulty of timing market bottoms, Kondawar emphasized process over prediction. His systematic deployment strategy allows for acceleration or deceleration based on market conditions while avoiding the trap of trying to perfectly time the market bottom.

"We never know where the bottom is. And we never know when the tantrums will also stop or when the new geopolitical order will also start or stop to shape up," he noted, justifying the gradual approach despite compelling valuations.

Key takeaway

Complete Circle Capital's message is clear: current market pessimism has created genuine opportunities in fundamentally sound mid and smallcap stocks, but investors should deploy capital systematically over 6-8 months rather than attempting to time a single market bottom. The combination of strong earnings, technical overselling, and upcoming policy catalysts creates a favorable risk-reward setup for patient, disciplined investors.