DSP Mutual Fund flags uneasy calm in markets, sees selective opportunities amid valuation resets

DSP Mutual Fund has released its February 2026 edition of the DSP Netra report, highlighting a curious disconnect between rising global risks and unusually calm financial markets, while flagging selective investment opportunities across Indian equities and bonds.At the global level, the report notes that the recent India–US trade deal has offered some relief after the exceptionally high tariffs seen in 2025, though it cautions that more progress is needed. This comes even as geopolitical tensions, trade wars and commodity price volatility remain elevated. Despite these risks, global stock markets continue to experience ultra-low volatility, a trend DSP describes as increasingly puzzling.

In Indian equity markets, DSP observes that equities have underperformed over the past year, leading to a sharp reduction in India’s valuation premium over other emerging markets. However, market drawdowns have remained shallow, reinforcing what the report calls an “unsettling calm” driven by persistently low volatility.
The report is more cautious on small- and mid-cap (SMID) stocks. While valuations have eased slightly, DSP says they remain expensive, with nearly two-thirds of SMID stocks trading at over three times book value. January 2026 saw significant price damage in this segment, which the fund house interprets as a weakening of market breadth. DSP advises investors to focus on stocks with lower past returns and more reasonable valuations when looking for opportunities in this space.From a sectoral perspective, the report notes that companies with high return on equity and stable business models are gradually moving towards fair valuations. Previously popular sectors such as IT and FMCG are being de-rated, bringing valuations to more attractive levels. DSP adds that recent corrections have begun to create opportunities across select industry groupings.

On asset classes, DSP sees long-duration bonds as a clear opportunity over the coming quarters and years. In contrast, it urges caution on precious metals, stating that gold and silver are trading above their theoretical values. The factors that drove the earlier rally in gold prices are starting to weaken, even though price momentum remains strong. With central bank gold purchases slowing and momentum-driven investors dominating flows, DSP advises patience and warns against being overweight on precious metals at this stage.