With demand weak, private capex subdued, and household incomes seeing limited growth, the government spending remains crucial, said Shridatta Bhandwaldar, chief investment officer-equities at the company. The previous budget marked a pivot towards consumption and revenue expenditure, and this one should avoid further tightening, he said, adding that defence capex is also expected to rise amid current geopolitical realities.
Other than that, “expectations from the budget are limited,” as it often excites markets but rarely delivers major changes, with taxation and strategic decisions increasingly happening outside it, said Bhandwaldar.
Sector-specific tax changes, such as in life insurance, have largely been addressed, while mutual fund taxation is unlikely to be altered as past hikes—from 10% to 12.5%—have hurt sentiment without boosting revenues, according to him. “Any tinkering usually occurs in bullish markets; divestment targets could rise to offset lower tax revenue, largely on paper.”
Edited excerpts:
Last year was a bit of a dampener, but expectations are that 2026 will be better. After its 2025 listing, what does Canara Robeco AMC expect?
From our perspective, it’s largely a continuation. The main change is that we are now a listed entity, which adds accountability and an extra layer of regulation and scrutiny, with investors watching closely. Over the last five to six years, we’ve seen steady growth, maintained or increased market share, launched new products, and expanded our equity offerings. Most core-category NFOs (new fund offers) are done, with arbitrage being the only core fund still pending.
We closed the year with roughly ₹1.1 lakh crore domestic equity assets under management (AUM) and around ₹16–17k crore offshore, taking total equity AUM/advisory to around ₹1.25–1.26 lakh crore. On the product side, we now have 14 equity-oriented products, so that part of the portfolio is largely complete.
What has changed now?
Over the past 12–15 months, India’s valuation-earnings context looked less attractive compared to markets like Brazil, Korea, Taiwan. This drove global money elsewhere, though our smaller size and strong products helped. Tariff issues, including the additional 25% penalty, also weighed on sentiment, contributing to ~$17–18 billion of FII (foreign institutional investor) outflows, offset by ~$80 billion of domestic inflows.
Now, three things are changing. First, earnings are bottoming, downgrades have largely stopped, and large-cap valuations have moved to fair levels, attracting FII interest. Second, India’s EM valuation premium has normalized to ~45–50% from nearly 80%. Third, tariff concerns may ease, while government measures—GST support, corporate tax cuts, and state welfare—boost consumption. Many other negatives, such as war concerns and credit slowdown, are also bottoming or reversing.
Overall, for 2026, the valuation and earnings backdrop is far more constructive than 18 months ago, improving both top-down and bottom-up prospects.
Which sectors are you currently most overweight on? And are there any areas you are consciously underweight or avoiding, such as export-oriented segments?
Consumer discretionary is clearly the largest overweight for us, covering both auto and non-auto segments. This includes autos, auto ancillaries, retail in various forms, platform and quick commerce companies, hotels, aviation, jewellery and select grocery retailers.
Pharma is another overweight, predominantly domestic branded pharma, along with hospitals and CDMO (contract development and manufacturing) players. Within industrials, defence and transmission and distribution are overweight. In financials, banks and capital market players are overweight, with NBFCs (non-banking financial companies) selectively so. Overall, financial services is an area where we remain constructive, picking stocks on a bottom-up basis.
Staples remain net underweight, though we have been gradually increasing exposure over the past 6–8 months, given our view that consumption will do better than capex over the next few years. IT is marginally underweight, not due to tariffs but because earnings visibility and the impact of AI-led transitions are still playing out. Oil and gas is also underweight due to regulatory uncertainties.
Among the sectors you mentioned as overweight, where do you see the strongest earnings growth coming from—financials or consumer discretionary?
Earnings growth will come primarily from consumer discretionary, followed by financials. Beyond that, selectively from industrials—specifically defence, EMS (electronics manufacturing), and transmission and distribution—where earnings remain healthy. Pharma and telecom should also see good earnings growth, with no major challenges.
Are there any sectors you’re consciously avoiding, given that your investment approach is fairly broad-based?
We don’t avoid sectors per se, but oil and gas and global commodities are our largest underweights. Metals have limited investible opportunities in India, as many companies don’t meet our criteria for management quality, ROA/ROCE, cash flow, and governance—making this a structural underweight. (ROA or return on assets, and ROCE or return on capital employed are measures of profitability).
Our approach is more about characteristics than sectors. We avoid businesses with weak execution, poor governance, or bad capital allocation. Inherently weak businesses—like metals—often trade near 20-year-old prices due to repeated capital raising. This applies to certain retail segments, tier-2/3 banks and NBFCs, and EPC (engineering, procurement and construction) companies. Essentially, we avoid businesses that don’t generate free cash flow or earn returns above the cost of capital, traits that cluster in certain sectors.
How is the cement sector looking?
The cement sector looks stable, though it hasn’t performed well over the past year, and the broader building materials space has struggled, with different drivers across segments. Cement demand is fairly homogeneous—across infrastructure, urban real estate or rural housing—with volumes up 7–9%. Other segments such as plywood, ceramics, and tiles have underperformed, likely due to unorganised competition and Chinese dumping, while wires, cables, and pipes have done well thanks to consolidation among a few large players.
Cement’s main challenge is profitability, not volumes. With strong balance sheets and a cash-based business, companies continue adding capacity to maintain market share. Despite the top five players’ market share rising from 30–35% to nearly 70% over 15 years, Ebitda per tonne has stayed around ₹1,000. Increased consolidation may eventually bring pricing power. Operationally, fundamentals are sound, though margins dipped recently due to higher costs and insufficient price hikes, especially in the east and south.
Large- or mid and small-caps — where is the better opportunity now?
Since March 2024, we’ve maintained that large caps offer better risk-reward, as valuations are near historical levels. The market is now far more sector- and stock-specific—performance depends on being in the right sectors, not on market cap. Banks, CDMO, EMS, and transmission and distribution are doing well across caps. We are increasingly focusing on bottom-up opportunities, as the disproportionate exuberance of 15 months ago has faded. While the broader market remains somewhat expensive, valuations have corrected, making it a bottom-up market driven by sector fundamentals rather than size.
Growth or value — what is working now?
The market is completely mixed. From 2017–2021, it was largely growth-driven; 2022–2024 leaned value, yet performance was mixed—PSU banks and platform companies both did well despite different PEs (price-to-earnings multiples). Metals and transmission/distribution also performed strongly. Today, the market is far more bottom-up, with investors buying wherever earnings are visible. A 30–40 PE stock growing at 25% or a 15 PE stock improving from 10% to 15% are both fundamentally “value”—the market responds to earnings, not labels.
What is your view on cash levels?
We typically stay within 5–6% cash levels. Investors allocate to equities for long-term growth, and trying to time the market often backfires. Staying invested has historically been more effective.
What are your expectations from the upcoming Union Budget?
Expectations from the Budget are limited. Historically, it excites markets but rarely delivers major changes, as taxation and strategic decisions increasingly happen outside it. The main hope is that the government avoids aggressive fiscal tightening. With weak demand, subdued private capex, and stagnant household incomes, government spending is crucial. Last Budget pivoted to consumption and revenue expenditure; this one should avoid further tightening. Defence capex is likely to rise given current geopolitics.
Any negative surprises you are worried about?
From our perspective, Budget expectations focus mainly on taxation rather than macro, as most policy levers have moved outside the Budget, leaving capex and fiscal or debt-to-GDP targets. Sector-specific taxation tweaks—like life insurance—have mostly been addressed, while mutual fund taxation is unlikely to change, as past hikes (from 10% to 12.5%) hurt sentiment without boosting revenues. Any tinkering usually occurs in bullish markets; divestment targets could rise to offset lower tax revenue, largely on paper.
Do you expect any easing of norms for foreign investors?
Some taxation changes may target foreign equity investors, whose treatment differs from domestic investors in credits and taxes. Reforms that don’t require spending—like those already allowed via Gift City—could also support growth, and FI-to-FI (financial institution-to-financial institution) measures might be possible. India’s equity taxation is unique, and foreign investors have raised concerns seeking parity with domestic investors. Broadly, Budget considerations fall into four areas: capex allocation, fiscal deficit management, raising resources through divestments, and implementing growth-friendly, non-spending reforms.
Will the rising interest in overseas investments continue?
The trend of diversification will continue—it’s not an either/or choice. Mutual funds have a $7 billion limit, already exhausted, so individuals can use the $250,000 LRS (liberalized remittance scheme) to diversify. Affluent investors naturally spread their exposure across market caps, managers, and geographies. This isn’t just India-driven; with more digital tools and investment vehicles today, global diversification is far easier than five years ago and will likely continue.
