Between FOMO and fundamentals: Kotak's Shrikant Chouhan decodes the market rally

Edited excerpts from a chat:
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What's your reading of retail investor behaviour right now? Have most of them learnt lessons after playing with fire by chasing SME and momentum-heavy smallcaps?
Operation Sindoor has also worked like an international defence expo showcasing the might of Indian defence companies. This is also reflected in the dramatic movement in share prices. How strong is the defence story on Dalal Street?
With valuations stretched in certain pockets of the market, do you think the Q4 earnings season was strong enough to justify the rally that we are seeing?
As an investor today, would you back consumption, capex, or financials in FY26?
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Indian markets have been on a bullish streak despite global uncertainties and geopolitical tensions. In this exclusive conversation with ET Markets, Shrikant S. Chouhan, Head - Equity Research, Kotak Securities, shares his insights on what's truly driving the rally - fundamentals or FOMO.He weighs in on the resilience of defence stocks post-Operation Sindoor, the caution warranted by current valuations, and the sectors likely to lead in FY26. With a tempered Nifty target and a focus on select large-caps and financials, he advocates a balanced, opportunity-driven investment approach.Markets are dancing near lifetime highs. How much of this is driven by fundamentals and how much by FOMO?Indian markets have delivered a strong performance over the past one month, despite global uncertainty. The market performance suggests markets to be pricing in the resolution of ongoing trade and tariff issues with the US and geopolitical risks being under control. There are some positives including expected good monsoon, RBI rate cut and lower inflation.Retail investors have been steady net sellers in Indian equities directly in recent months and reducing net inflows into MFs, with increasing gross outflows. The average retail investor appears to have turned more cautious.We don't have active coverage on defence stocks, however, most of these stocks seem to be trading at expensive valuations. Adding ETFs with a view of more than 12 months would be the prudent strategy.Our FY26E/27E net profits of the Nifty-50 Index have seen cuts since the start of CY25. Nifty-50 index is trading at ~22x/19x on FY26E/FY27E earnings. The focus should be in large-caps with select presence in mid-cap and small-cap. In the banking space, we find value in the larger names. For the mid-cap and small-cap, the approach should be stock-specific with focus on growth and valuation matrix.We are giving priority to financials but we cannot leave the consumption sector, which is attractive with a view of 12 months. For capex related stories, we need to be selective.Given current earnings momentum, macro tailwinds, and political stability bets, is Nifty 30,000 a realistic target by end of FY26? No.Our Nifty target is 26000 that is based on the EPS of ~Rs1300 for FY27E. However, we would like to add that we are observing a steady cut in the EPS, and if that continues then there is a risk to our target.Investors have been caught between two battlefronts lately — the global trade tariff war and the near war-like tensions between India and Pakistan. Now that both seem to be easing, what are the key takeaways for investors from this double dose of geopolitical anxiety?Both bulls and bears are likely to benefit from the current market momentum, given the volatility. However, investors should consider seeking investment opportunities during dips, as the intensity of news flow has significantly decreased, which will help minimize potential downside risks for the market.

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