Expert view on markets: The Indian stock market has underperformed many major global peers this year, mostly because of concerns over US tariffs, heavy foreign capital outflow, stretched valuations, and weak earnings. However, hopes prevail that the worst is behind us and the market may see a healthy rebound next year due to earnings recovery and a potential India-US trade deal. Mythili Balakrishnan, co-fund manager at Alchemy Capital Management, believes several factors point to an earnings revival from Q3FY26. In an interview with Mint, Balakrishnan shared what she expects from the markets next year, India’s macro situation, the Indian rupee, and AI as a theme for investment. Here are edited excerpts of the interview:
Nifty 50 looks set to end 2025 with modest gains. What is the outlook for 2026?
In our view, markets are likely to broadly mirror the earnings trajectory. The earnings trend has strengthened, with second-quarter results showing a clear improvement — Nifty 500 PAT grew nearly 16% in Q2FY26 — and the second half of the financial year (H2FY26) is expected to stay healthy across several sectors, especially consumer discretionary after GST cuts.
While we expect markets to move in line with earnings, the journey is unlikely to be smooth.
External variables such as global interest rate movements, progress on trade deals, currency and commodity swings, geopolitical developments, and foreign flows may continue to generate bouts of volatility. With valuations elevated in parts of the market, any earnings disappointment could also prompt sharper corrections.
What are the key factors that indicate earnings could revive from Q3 onwards?
Multiple factors point to an earnings revival from Q3FY26. Improved consumer sentiment—helped by recent GST reductions—should aid demand and support premiumisation trends.
This is already reflected in stronger auto sales across passenger vehicles, two-wheelers, and commercial vehicles. The real estate segment also remains robust, providing a strong domestic demand anchor.
Currency trends are turning favourable for the IT sector, which should support both revenue and margin improvement. In addition, sectors such as defence, power, and capital goods continue to report strong order books, offering clear visibility on execution and earnings growth in H2FY26.
While domestic tailwinds remain, do you think the biggest risk for India is further delay in securing a trade deal with the US?
A prolonged delay in securing a trade deal—especially as the US progresses with agreements involving other key partners—poses a meaningful external risk for India.
The US is India’s largest export market, and uncertainty around tariff structures, data norms, and market access puts several labour-intensive sectors, such as gems and jewellery, chemicals, textiles, leather, and engineering goods, at a relative disadvantage.
A continued lack of clarity could also dampen domestic capex plans in export-linked industries, as firms may hesitate to commit to new capacity without visibility on long-term trade terms.
What is your view on India’s macro? Does it indicate we may see momentum back in mid and small-caps?
India’s macro backdrop remains supportive, with steady domestic demand, improving investment activity, and healthy corporate balance sheets.
While the Nifty 500 grew around 16% in Q2FY26, mid- and small-cap companies outperformed with more than 20% earnings growth, reflecting stronger operating leverage and lower material costs stemming from lower coal, oil and steel prices.
Is AI still a theme to bet on?
Yes, AI remains a compelling long-term theme, but India currently has limited direct, pure-play AI opportunities in the listed space.
Most exposures today come indirectly—through enablers and beneficiaries such as IT services firms investing in AI-led productivity and automation, electronics manufacturing services (EMS) companies benefiting from global supply-chain shifts, and data-centre, cloud, cooling, and engineering companies building the infrastructure.
The Indian rupee has touched historical lows. How should investors position themselves for currency headwinds?
Long-term investors should maintain a balanced portfolio with a mix of domestic demand and export beneficiaries. In our view, export-oriented companies such as IT services, pharmaceuticals, and engineering act as natural hedges during periods of currency weakness.
However, we would avoid trying to time currency movements, as forex markets tend to be volatile and influenced by multiple global factors. In our view, a disciplined allocation approach is typically more effective than reacting to short-term swings in the rupee.
What are the sectors that may generate alpha in the market?
In our view, alpha generation is likely to come from sectors where earnings visibility is improving, and valuations remain reasonable.
Industrial and investment-linked segments—including defence, power equipment, and electronics manufacturing services (EMS)—continue to benefit from strong order books, policy support, and multi-year capex cycles.
Export-oriented sectors such as engineering and speciality manufacturing, IT services, contract development and manufacturing organisation (CDMO) players, and select pharmaceutical companies may also outperform, supported by currency trends and stabilising global demand.
A successful trade deal with the US could be an added positive.
Additionally, capital-market plays stand to benefit from multi-year, penetration-led growth as financialisation deepens across households and businesses. Overall, we believe alpha in 2026 is likely to be stock-specific rather than broad-based, favouring companies with pricing power, resilient balance sheets, and consistent execution.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
