Edited excerpts from a chat:
The year 2025 saw supply pressure from IPOs and promoter selling absorb a bulk of domestic demand. Do you think the new year would see similar supply-side pressure leading to subdued returns?Supply follows fund flows and, in a way, is also a sign of a healthy market as it prevents valuations from going up too quickly. So it is possible we see a similar pace of new issuances and secondary sales next year, if the trend of strong domestic flows as seen over the last few years continues. SIP flows have stayed resilient through a market downturn in the first two months and have actually grown through the year despite mediocre returns which perhaps points to change in investor behaviour. What is the kind of earnings expectations that you are baking in for the market across major sectors for Q3? Would it be better than Q2?
Yes, I think we should start seeing the positive impact of the tax and GST rate cuts along with the substantial repo rate cuts, on consumption demand in the second half of FY26. Domestic facing consumption businesses should also benefit from festive season demand. Government capex spend is ahead of last year and risk of meeting budgeted capex looks minimal. There is a higher chance of broad-based earnings growth recovery in FY27 across banks, NBFCs, telecom sectors among others.What are the market’s expectations from the Budget? There has been a clear push towards consumption rather than capex-led growth in the last one year. How do you think the Budget can change that?Our analysis shows that the government delivered a substantial fiscal stimulus through tax and GST cuts of around INR 4.5 trillion (around 1.3% of GDP) in CY2025. Against this backdrop, government fund capex has already grown at around 25% CAGR post Covid, so I think it would be fair to expect some slowdown of major budget announcements on both consumption and capex front, especially if the government intends to stick to the publicly announced fiscal glidepath. We have seen some rally in Budget-related stocks, railways in particular. How are you positioning your portfolio ahead of the Budget?Our investing style is sector agnostic, and we look to invest in high quality companies with clean accounts, strong balance sheets, returns on capital greater than cost of capital for long periods of time, and available at reasonable valuations, irrespective of macro or themes. As such, apart from keeping a watch on broad trends, we don’t pay much attention to the budget as we see that as at best a statement of central government’s accounts.
The pain in smallcaps as well as select midcaps has been troubling a lot of portfolios. Do you see the market improving for them incrementally in the next few quarters?I think it is still quite early to say if sentiment towards small and midcaps will turn positive in 2026. Firstly, both small and midcaps started the year at stretched valuations so the correction this year can be partially attributed to mean reversion in valuations. Secondly, even though market breadth has come down versus last year, we still see around half of the BSE 500 stocks above their 200-day average. However, we could see a more broad-based rally over the second half of FY26, if FPI selling recedes on back of better than expected earnings growth, easing inflation, potential progress on a trade deal with US and US rate cuts.
Which sectors of the market are you bullish on for the next one year?Structurally we like healthcare services where rising penetration over the next 10-15 years, should be a positive for the likes of hospitals, diagnostics and health insurance. Companies in insurance, RTAs, depositories and wealth management offer attractive plays on the structural trend of financialization of household assets, which is underway. IT stocks could also offer some bargain buying opportunities as they have borne the brunt of the record FPI outflows this year, with Nifty IT down around 9% from last year.
What are the risks that investors need to be mindful of as they step in 2026?FY27 and FY28 index level EPS growth is expected to be in double digits, so any meaningful downgrades to these expectations could drag down the returns. Any slow down in exports due to delay in reaching a trade deal with US poses a risk to current account deficit. Also, while the broad market has corrected over 2025, in my opinion investors should still be mindful of valuation risks in pockets like auto and defence stocks, where stock prices might have already rerated in expectation of future earnings growth.
