Apart from banking and financial services, a part of the Nifty 50 index is linked to commodity prices and large stocks in the energy, metals, and mining which may see significant growth next year. And this will provide further tailwind to Nifty earnings, which could be around 15%, said Singh.
Edited excerpts:
Q 1) Analysts estimate that profit will grow 1.7% this quarter (Q3). We have been saying that earnings growth is coming back, and the goods and services tax (GST) cut might fuel it. Why is this not happening?
The growth has just started in different pockets, plus there are some hits and misses as some input tax credits are not fully passed on. It is definitely a structural positive, but the impact of demand revival on earnings will probably come by fiscal 2027 and not really this year. In the last quarter, we saw the starting signs of GST cuts working in the insurance and auto sector. Last year, Nifty 50 earnings per share growth was in the 3% range. This year, it is likely to be in the 7-8% range. And next year the expectations are around 15%.
Apart from banking and financial services, which are likely to see a rebound in earnings growth, a material part of the index is linked to commodity prices, and large stocks in the energy, metals, and mining sectors are likely to see significant growth next year, which will provide further tailwind to Nifty earnings. Also, IT (information technology) downgrades have stopped, even though there are no strong upgrades. So there is unlikely to be any drag on corporate profitability for IT companies. That is a relief, though not a growth driver.
Q 2) US has indicated that countries purchasing Russian oil could face additional tariffs, and similar measures are being discussed for trade with Iran. How do you see this influencing global oil prices? Could there be any direct or indirect impact on India?
Oil, so far, has not really been impacted by all this uncertainty. Oil demand has been generally weak, and the market has been well supplied. Demand is not going through the roof, so there is little fundamental risk of crude prices rising on purely demand-supply grounds. Geopolitically, however, the situation needs to be watched.
In India, crude acts as a hedge in the portfolio. If crude prices go up, macroeconomic factors are more affected than corporate earnings. To that extent, energy stocks can act as a hedge in the portfolio, but we do not have much pure-play exposure to oil prices in India.
There will be companies that supply to the oil and gas industry, which would benefit, especially on the exploration side, like EPC (engineering, procurement and construction) companies that do significant business in the Middle East and the UAE, which benefit from higher oil prices. These companies would benefit from higher order flows and better payments.
Q 3) Domestic markets have remained resilient, largely because domestic institutional investors (DIIs) have been absorbing the persistent selling by foreign institutional investors (FIIs). Is there a risk that markets are overlooking signals that FIIs may be responding to, but DIIs are not?
FIIs do not have only India to invest in. In mid-2024, India’s valuations were at an 80-90% premium to other emerging markets. After that, we have witnessed an earnings slowdown, while other economies benefited either from participation in the AI (artificial intelligence) theme or from China’s recovery driven by stimulus. So global money has followed that. Now growth is coming back in India, and the valuation premium has come down to 50-60% which is closer to the historical mean.
We have reached a point where, if emerging markets start receiving flows—which is possible given the uncertainty in the US macro environment—India will get its share. If emerging markets as an asset class start to get sustainable flows, FPIs need not have to sell India to buy China.
Q 4) It is often argued that FIIs have a wider set of investment options globally compared to domestic investors, hence they are selling India. If we look at it from a fund manager’s lens, he is selling the stock because fundamentals don’t look great. Is that stock India for FIIs?
We look much better than we did a year and a half ago. Valuations were expensive. Are we at absolute rock-bottom valuations where one should put 100% into equities? I would not say that. But we are much better positioned than we were in July 2024. A lot of thematic froth in manufacturing, defence, capital goods, and power has gone away.
Q 5) Are there any other spaces where you see froth?
Manufacturing and some parts of the capital goods sector have a lot of optimism, which may not be justified. But it is also now at the individual stock level, and the thematic behaviour has reduced significantly since mid-2024. That is why we are continuing to witness time correction in those sectors, and that could continue depending on actual delivery.
Q 6) Why manufacturing and capital goods sectors?
The starting point of valuations was very high. Execution is never easy, and we have seen misses. When stocks are perfectly priced to heightened expectations, meeting those does not generate additional returns, but any miss can hurt valuations badly.
Q 7) What is your investment philosophy?
The starting point of stock selection is always valuation, but valuation alone is not enough. The focus is on whether there are identifiable triggers for profit surprises or positive earnings upgrades over the next 12-24 months. Portfolio construction then becomes the second layer, with each scheme run differently depending on investor expectations. For instance, large-cap and large-and-mid-cap funds may be split evenly between steady companies and growth-at-reasonable-price (GARP) stocks.
Q 8) Do you think generating alpha has become difficult? We have so many mutual fund schemes, common research, and steady inflows, even when markets are not moving.
Alpha can be generated over longer periods. The real challenge is investors’ growing short-term focus—expecting alpha every year—which is challenging. In the short term, markets can be driven more by themes and sentiment than by earnings or valuations, making outperformance harder unless higher risk is taken. Funds that outperform during such phases often struggle later when the cycle turns. Therefore, alpha should be assessed over longer horizons of three to five years or more, not over short-term periods.
Q 9) Where do you see flows moving this year?
Flows this year are likely to favour core categories such as multi-asset, flexi-cap and large-cap funds, while within thematics, banking remains well recognized and resources and energy could also see interest. Small- and mid-cap funds have not yet lost favour with flows, but a gradual shift towards large-caps is likely this year.
