Expert view on markets: Devarsh Vakil, Head of Prime Research, HDFC Securities, says a confluence of factors, including geopolitical uncertainties, ongoing earnings season and institutional capital flows, keeps the market volatile. He adds that steady retail participation provides crucial market support during corrections. In an interview with Mint, Vakil says banks, cement, chemicals, defence, pharmaceuticals, metals, logistics, and telecom may generate alpha in FY26. Here are edited excerpts of the interview:
Markets are swinging between gains and losses. What, in your view, is driving this volatility?
Geopolitical uncertainties, ongoing earnings season, institutional capital flows, and derivatives expiry dates are the primary drivers of volatility in the Indian stock market.
Unresolved issues on India’s borders contribute to uncertainty that affects investor confidence and economic planning. Disputes occasionally along the Line of Actual Control (LAC) with China continue to present national security challenges. Cross-border terrorism from Pakistan and India’s response weighed on investor sentiment and business confidence.
The strategic competition between the United States and China continues to be a defining feature of the global landscape, impacting trade, technology, and security alliances worldwide.
The war between Ukraine and Russia remains a primary source of instability in Europe, with significant humanitarian, economic, and geopolitical ramifications.
Rapid advancements in areas like artificial intelligence (AI), quantum computing, and cyber capabilities are creating new arenas for geopolitical competition, especially between China and the West.
What is your medium-term outlook for the markets? Which key triggers do you believe will shape the direction going forward?
India’s markets and economy have demonstrated remarkable resilience, consistently overcoming domestic and global challenges.
The medium-term outlook remains bright, supported by robust growth prospects driven by a domestically oriented economy, youthful demographics, and advancing digitalisation, creating diverse, high-quality investment opportunities across industries.
India’s domestic economic foundation provides protection against global volatility, reinforcing that market downturns are temporary.
The country’s ongoing trade negotiations with Western nations will strengthen international business ties, expand export opportunities, attract steady foreign investment, and enhance global competitiveness.
Monthly systematic investment plan (SIP) inflows across mutual funds continue showing consistent growth, driven by rising disposable incomes and increased awareness of disciplined investing. This steady retail participation provides crucial market support during corrections.
How do you assess the Q4 earnings season? Have the results largely met or exceeded market expectations?
The earnings season has met subdued expectations. Among 43 out of 50 Nifty companies that have reported, aggregate topline and bottom-line growth reached 5-6 per cent as anticipated.
Consensus estimates project 12-13 per cent growth for the next year, which appears achievable.
Banks, IT services, consumer, real estate, PSU banks, and non-lending NBFCs registered downgrades. Metals and OMCs (oil marketing companies) saw upgrades post these quarterly results. Automobile, NBFCs, and pharmaceuticals sectors saw notable upgrades in their FY26E EPS estimates.
There is growing talk that the US-China trade deal might divert foreign capital from India to China. How do you view this possibility, and what impact could it have on Indian equities?
While US-China trade normalisation might trigger temporary capital flows from China, the longer-term outlook remains strong due to structural advantages.
India’s path to becoming the world’s third-largest economy, supported by favourable demographics and rising per capita GDP, creates expanding domestic markets that attract both production and export-oriented FDI, as seen with Apple’s manufacturing expansion.
Government fiscal prudence and India’s inclusion in global debt indices ensure steady bond flows, while foreign investors benefit from easier market access compared to China’s restrictions.
Declining inflation and lower energy prices support rate cuts, boosting capex and future growth potential.
Indian corporations offer superior growth prospects, higher return on capital, and better governance standards than their Chinese counterparts – factors increasingly valued by institutional investors.
Any near-term diversions to China likely represent tactical shifts rather than strategic repositioning. India’s structural growth story, improving business environment, and corporate quality should continue attracting foreign capital across equity and debt markets, making temporary outflows a buying opportunity rather than a fundamental concern.
How do you expect India’s growth-inflation dynamics to play out in the current financial year? What risks and opportunities do you foresee?
The Reserve Bank of India (RBI) forecasts GDP growth at around 6.5 per cent. On inflation, the RBI expects CPI inflation to be around 4 per cent for FY26.
Strong domestic demand, fuelled by tax cuts and recovering rural consumption due to an above-normal monsoon, remains a key driver. The continued government focus on infrastructure and manufacturing—”Make in India” will boost investment.
The service exports are expected to show resilience. Indian manufacturing is gradually benefiting from global supply chain diversification efforts. Global trade war-related uncertainties, including trade tensions and volatile commodity prices, pose significant external risks
Which sectors, in your opinion, are best positioned to generate alpha in FY26?
BFSI remains our preferred sector this year. Beyond this, we favour selective opportunities across cement, chemicals, defence, pharmaceuticals, metals, logistics, and telecom to generate alpha.
Banks: RBI has cut repo rates by 50 bps, and we expect a further 50-75 bps reduction in FY26 as inflation has been firmly under control. Asset quality has improved across the board, and the trend could continue in the coming quarters. PSU banks have benefited from recoveries/upgradations and are likely to witness MTM gains due to falling yields.
Cement: Increase in prices across regions (south being the leader, followed by east, central and west) on the back of an improvement in demand.
The Indian cement industry is witnessing robust growth with a 7-8 per cent CAGR demand forecast through 2027, driven by strong infrastructure spending and housing demand, alongside an unprecedented consolidation phase where major players have aggressively acquired over 65 million tonnes of capacity recently, enhancing market reach, operational scale, and pricing power.
Chemicals: There has been an increase in consumption of durables and non-durables, especially speciality chemicals, leading to demand growing faster than supply.
Agrochem: A better monsoon forecast this year should boost the growth outlook of agri inputs, and will also benefit from recent inventory destocking.
Pharmaceuticals: In the US, price erosion has stabilised in the base business. It was primarily offset by a robust contribution from niche products. The domestic formulation business would see steady growth of 8-14 per cent, depending on its therapeutic focus. Chronic should lead the growth of about 200- 300 bps ahead of overall IPM growth.
Metals: government measures such as a 12 per cent safeguard duty on flat steel imports to protect domestic producers amid rising imports. Steel demand in India is projected to grow by approximately 8-10 per cent in 2025, driven by intensified infrastructure spending, vigorous construction activity, and supportive government policies, positioning the sector for continued expansion.
Logistics: Falling energy costs will lead to margin expansion in steady demand.
Government support for consumption, rising e-commerce penetration, and rural market expansion create a favourable backdrop for logistics companies.
Telecom: Driven by improved average revenue per user (ARPU), expanding 5G adoption, and continued growth in home broadband connections. We expect to see another ARPU hike in the next one to two quarters.
Defence and PSU stocks are once again gaining investor attention. Do you see long-term value in these segments? If so, which themes or names look attractive at this point?
The defence sector, particularly in light of the Indian government’s strong push for ‘Atmanirbhar Bharat’ and ‘Make in India’ initiatives, has emerged as one of the most promising sectors within the Indian markets.
These policies are fundamentally reshaping the industry, creating significant opportunities for domestic players.
We have been optimistic about this space and have recommended various defence stocks from time to time, contingent upon our assessment of valuation and margin of safety.
Shipyards stocks look very promising for the longer term. Overall, the long-term trajectory appears positive, driven by a clear policy direction and a focus on indigenous manufacturing and procurement.
When it comes to PSUs, it’s important to recognise that this is a very broad and diverse category, encompassing companies across numerous industries. Therefore, a generalised view on PSUs would not be appropriate. Our approach is more selective.
Currently, we see potential in select PSU banks. These institutions are benefiting from a healthier credit cycle, improved asset quality, and a supportive macroeconomic environment. However, we maintain a cautious stance on PSU oil and gas companies at this juncture.
Read all market-related news here
Read more stories by Nishant Kumar
Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions, as market conditions can change rapidly, and circumstances may vary.
