Summary:
This summary draws from the “Market Insight Equity – December 2025” webinar, featuring Vetri Subramanya (MD and CEO Designate) and Nathan Jain (Fund Manager, UTI Small Cap Fund and UTI Innovation Fund), covering global dynamics, market valuations, and the strategy of the UTI Small Cap Fund.
Global and Macroeconomic Drivers
China’s Export Powerhouse and Pricing Pressure: China reported exports exceeding $1 trillion in the first 11 months of 2025, a figure higher than the GDP of most countries. Export growth remains strong, particularly accelerating towards the EU and ASEAN countries, despite tariff discussions with the US. This dominance stems partially from extensive state incentives (subsidies, tax concessions, below-market cost borrowings), which have led to massive industrial overcapacity—for instance, China’s solar module capacity is 150% of global demand. This overcapacity causes weak pricing trends globally. Interestingly, China’s economically active population has been shrinking for nearly a decade, yet export production continues to rise, often shifting to automation and high-tech sectors, resulting in constrained wage growth
Currencies and Competitiveness: The US Dollar has been depreciating, while the Indian Rupee (INR) touched an all-time low of 90 per USD. While a strong exporter, the Chinese Yuan has weakened against most global currencies, further feeding its export advantage. However, the Yuan has appreciated against the INR, which improves India’s competitive position relative to China
Gold and Household Leverage: Indian households are estimated to hold approximately 35,000 tons of gold, valued at nearly 90% of India’s GDP. Due to recent price appreciation, gold purchased over the last decade is now valued at double the original cost. This asset appreciation is notable, as household debt in India has been climbing consistently (reaching 42% of GDP in December 2024), driven particularly by non-housing retail loans. Gold holdings offer Indian households optionality to delever should they choose to do so
Market Valuations and Allocation Strategy
Inflation and Interest Rates: Inflation in India is contained, with core inflation running around 4%. This comfort has allowed the Monetary Policy Committee (MPC) to cut rates and the RBI to provide liquidity infusions
Valuation Disparity: Aggregate market capitalisation is currently 68% Large Cap, 22% Mid Cap, and 10% Small Cap. Small and Midcaps have increased their weightage, partly due to new listings and partly due to trading at richer valuations relative to Large Caps. Over the last year, the Nifty50 has returned +6%, while the Nifty Small Cap Index returned -12%
Equity Allocation Index Comfort: Based on P/B, Dividend Yield, P/E, and P/E to Bond Yield, the Nifty50 is currently in the fair value zone, positioned at the lower end. However, Midcaps are in the absolute expensive territory, and Small Caps are in the expensive zone relative to their own history
Key Risks and Opportunities: The primary risks identified are the low nominal GDP growth (sub 10%) making the consensus corporate earnings growth estimate of 16-17% for FY27 look like a “very high bar,” and the elevated valuations in the small and midcap segments
Opportunities are seen in:
1. Hybrid Funds: Attractive due to positive carry available in the fixed income component and the benefit of automatic rebalancing.
2. Financials: The sector is well-positioned to benefit from the resumption of credit growth and the inherent leverage that allows earnings to grow faster than credit growth, helping lift nominal growth.
3. Large Caps: Preferred for lumpsum allocations due to more comfortable valuations
Focus on UTI Small Cap Fund
The Small Cap Value Proposition and Risk: The Small Cap universe provides exposure to segments unavailable in Large Cap or Mid Cap indices and has historically produced the largest number of multibagger stocks. However, this segment carries high risks; analysis shows that over a recent 10-year period, 162 out of 750 small cap companies saw value destruction exceeding 50%. Small caps also receive less analyst coverage and institutional ownership, requiring greater due diligence.
Investment Strategy and Positioning: The UTI Small Cap Fund employs a rigorous filtering process, specifically avoiding companies with: value-destroying business models, balance sheet risks (high debt), and poor corporate governance records.
The fund focuses on quality and growth, identifying four categories of investment: Category Leaders (e.g., MCX), Challengers (growing faster than large competitors), Specialty Pure Plays (operating in high-growth subsegments), and Opportunistic Stocks (value, cyclicals, or strategic change plays).
The fund remains true to label, with 83% exposure to small cap and 17% to midcap stocks. Its quality and growth focus is reflected in a higher Return on Equity and a higher P/E ratio (45x) compared to the benchmark (41x)
