The market movement this year has to be seen in the context of the healthy returns last year.

There are macro-level challenges currently, especially due to oil prices. But the general expectation is that oil is unlikely to go up consistently and hence its impact is unlikely to worsen. We believe the current phase is the normalisation of valuation rather than a change in long- term fundamentals.

Midcap valuations are still stiff. Wherever there is flexibility we have preferred large caps due to better valuations.

From a valuation basis combined with long-term growth potential, we like big corporate lending banks, insurance and pharma.

We are underweight on FMCG due to high valuations.

The current earnings season has been fairly healthy except for corporate lending banks. Corporates exposed to the rural segment have posted good results and the outlook is also positive. The retail lending and consumer discretionary segments continue to do well.

We expect FY19 to be better for earnings as the drag of GST will not be there, global growth remains reasonably healthy, election-related spending will aid consumption and the base for domestic cyclical sectors is favourable as the capex cycle has still not gathered momentum (though it seems to have bottomed out).

The rise in commodities will put pressure on margins. But if the economy is in recovery mode, the operating leverage through better top-line growth should help mitigate this. Branded segments like FMCG, consumer discretionary and so on should be able to pass this on better than sectors like aviation and cement.

Corporate lending banks are expected to have a tough phase in terms of earnings for the next few quarters due to high provisioning requirements. But the large ones among them are at attractive valuations from a long-term perspective.