Indian equities are scaling new highs, but rising US Treasury yields are creating fresh uncertainty for investors, particularly in expensive mid- and small-cap segments. According to Harish Krishnan, CIO – Equity at Aditya Birla Sun Life AMC, the current market action represents a combination of both healthy rotation and growing complacency. As reported by ETMarkets, Krishnan noted that while there is significant investor interest in mid and small caps at aggregate levels, the bar for positive surprises has become much higher. The key question remains whether the rotation is being supported by earnings or simply by liquidity and momentum.
The biggest risk with record highs is investors confusing momentum with quality, particularly in parts of the mid- and small-cap universe. According to Krishnan's analysis reported by ETMarkets, when liquidity becomes abundant, the distinction between good businesses and good stocks tends to get blurred. The CIO emphasized that quality should encompass growth, return on capital, cash flows, and the ability to compound without requiring continuous market re-rating. Rather than participating in businesses where valuations leave little room for disappointment, the approach focuses on businesses with genuine earnings trajectory improvements.
The market needs to become more discriminating when investing in structural themes like capex, defence, manufacturing, power, and AI. As reported by ETMarkets, Krishnan cautioned that large themes don't automatically make every participating company a good investment. For AI investments, the focus should be on businesses where AI can materially improve unit economics, customer acquisition, or productivity rather than companies supplying small components in the AI value chain. Similarly, the approach to capex should emphasize who has pricing power, attractive returns on capital deployment, and the ability to sustain those returns over time.
Rising US Treasury yields pose more meaningful risks for expensive mid and small caps than for the market as a whole. According to Krishnan's assessment reported by ETMarkets, when the risk-free rate moves higher, the market becomes less willing to pay very high multiples for earnings still several years away. The impact is particularly pronounced on parts of the market where valuations are already stretched and investment cases depend heavily on continued liquidity. Businesses with strong balance sheets, visible cash flows, and reasonable valuations should hold up better than companies where investment theses are predominantly based on future expectations.
For investors sitting on 30-40% gains in mid- and small caps, the decision should not be based purely on recent appreciation but on whether stocks still offer attractive risk-reward after gains. As reported by ETMarkets, Krishnan emphasized that rotating from one midcap to another simply changes the horse without altering the underlying risk. The current opportunity set within mid and small caps is becoming increasingly differentiated, and winners may look different from previous cycles. The approach requires looking at portfolios with a fresh lens to assess how earnings, valuations, and margin of safety have evolved across businesses.
