The tariff issue remains a “major uncertainty”, but he is not overly concerned at this point. “My sense is that the overall outcome will likely be neutral to positive for India.”
Manghat neither expects a major impact on 9 July nor believes that the risks have completely faded.
That said, markets seem to be in a consolidation phase, with sideways movement since September 2024, he noted. While declines have been followed by recoveries, new highs remain elusive, indicating a time-based consolidation. He expects returns to stay volatile.
Edited excerpts:
How do you expect India’s growth story to translate into equity market returns? What’s your outlook on the markets?
The market outlook is positive. The Reserve Bank of India (RBI) projects 6.5% GDP growth this year, a solid base that could rise to 7% or more with favourable macro factors. Strong agriculture and a good monsoon will support rural demand and GDP. Inflation around 4% implies nominal GDP growth of 10.5-11%, making India one of the few large economies growing in double digits in nominal terms, and this may continue for the next few years.
We see multiple economic drivers within infrastructure, manufacturing, consumption andfinancialization (of savings) themes. This, along with government incentives, stable costs, improving margins, lean balance sheets, low taxes and potential rate cuts, supports a case for strong corporate earnings.
Earnings growth of 10-12% for Nifty in FY26 seems achievable, with smaller companies possibly growing faster.
Do you see this as a phase of runaway growth, or is there room for some consolidation along the way?
In terms of returns, the kind we saw in 2022-24 will be difficult to repeat. Investors shouldn’t expect that level of performance again. Those strong gains came from a very low base, whether in GDP or other economic indicators, so high growth was almost inevitable.
Now, markets seem to be in a consolidation phase. Since September 2024, we have seen about six to seven months of sideways movement, with declines followed by recoveries, but no new highs. This trend could continue, with markets moving higher at times and then pulling back. So, a time-based consolidation is underway.
Returns may remain volatile, with ups and downs, and investors should moderate expectations compared to the exceptional gains of the past couple of years.
Who are the likely winners, sector-wise?
Over the past two to three years, growth has been driven by the government’s strong push on infrastructure and investments since 2020-21, with manufacturing emerging as a key sub-theme. These form the core pillars of the economy and market.
Sectors benefiting will align with these pillars. The investment theme, especially infrastructure, continues to thrive, supported by rising government capex—from 1.7% of GDP in 2020 to 3.2% now.
Private capex is also gaining momentum, and states are starting to contribute more. Overall, this growth cycle will benefit the entire investment and infrastructure ecosystem, including logistics.
What are the other areas that look exciting to you?
A key theme is consumption. While rural demand had been weak and urban demand softened, easing inflation—from 6.3% last September to below 3% now—is positive. Inflation is expected to be around 4% in FY26, supporting middle-income and rural spending.
Interest rate cuts totalling 100 basis points (bps) are gradually flowing through as deposit growth improves. Consumption should strengthen, starting with low-ticket items like food, beverages, and retail, accelerating by the September-December festival quarter.
Another theme we see is the financialisation of household savings, including capital markets and non-lending financials like insurance, asset management, broking, and exchanges. We see this segment at the beginning of a strong, long-term growth cycle.
We also remain constructive on lending businesses, especially banks and non-banking financial companies (NBFCs), given supportive liquidity, regulatory measures and tax relief for consumers, all of which should support credit and consumption.
That, in turn, will benefit credit-sensitive sectors like autos and housing, helped by better access to finance and lower borrowing costs.
What about pharma and IT?
These sectors, especially IT, are largely driven by global factors, particularly the US outlook. Much depends on US growth and corporate sentiment around discretionary IT spending. FY25 was weak, and while there were hopes for a stronger FY26, concerns around tariffs, inflation, and slowing growth are clouding visibility.
For now, it’s a wait-and-watch situation. The first quarter may remain soft as uncertainty keeps companies cautious with budgets and deal-making. But over the long term, Indian IT companies’ competitive edge remains intact. It is just a space that needs more selective and careful positioning for now.
What about the pharma space, as there is a China plus one angle?
Absolutely. The challenge is that it’s very company-specific. Each has a different model and product mix, so it is hard to generalise. That said, we are quite positive on the Contract Development and Manufacturing Organisation (CDMO) space, and most of our exposure is tilted toward that in our funds.
We are more constructive on healthcare overall than on pharmaceutical manufacturing. Hospital chains, in particular, are seeing steady growth. We would even view them as part of discretionary consumption, as incomes rise, people naturally seek better healthcare infrastructure. It is already playing out, and we see stronger growth potential there compared to other segments.
Domestic flows, especially from domestic institutional investors (DIIs), have been strong this year, far outpacing foreign inflows. Do you think this trend will continue? What’s driving such high domestic conviction compared to relatively cautious foreign institutional investor (FII) sentiment?
As I mentioned earlier, this is likely the beginning of a multi-year shift toward the financialization of savings, with more investors channelling funds into the markets. Penetration is still quite low, whether in mutual funds or direct stock market exposure and largely concentrated in major cities, though it is now gradually reaching smaller towns. On a pan-India level, there’s still a long way to go.
As income levels rise and basic needs are met, more people are looking to invest, and that trend is likely to continue. So, on the domestic side, we remain confident that investor flows will be sustained. Of course, there could be short-term blips, but over the long term, the trend looks promising.
On the foreign side, FIIs have trimmed their India exposure in recent quarters and are underweight to some extent. But that could change. In fact, the last two to three months suggest a shift, with flows turning more positive. While overall numbers may stay muted for now due to global uncertainty, I do believe foreign money will return eventually.
So, the whole geopolitical stress is largely behind us?
We don’t really know. No one does. So I wouldn’t go so far as to say it’s all behind us. There are still ongoing conflicts, tariff negotiations, and behind-the-scenes discussions. A lot is still in flux. From where we are, it’s hard to say exactly what’s unfolding. So yes, the tariff issue continues to be a major uncertainty. That said, I’m not placing too much weight on it right now. My sense is that the overall outcome will likely be neutral to positive for India. I don’t expect any major impact on 9 July, but I wouldn’t say the risks are completely off the table either.
Are you adjusting your portfolio in response to the current geopolitical landscape?
No, not really. Geopolitics isn’t something we directly act on.
Perhaps reducing exposure to companies with significant foreign operations or a larger international presence?
I would say our weights have been somewhat moderate, many of our funds are either neutral or slightly underweight. This likely reflects some of the lingering uncertainties I mentioned, such as spending in certain industries or discretionary IT budgets. But beyond that, we have not made any moves to reduce exposure to exports or country-specific risks, as that’s not really feasible.
Has investors’ home bias increased due to global uncertainty and ongoing conflicts?
They may be diversifying, but not investing as much in global equities compared to domestic ones. It’s not easy to put money into global equities anyway, there are RBI-prescribed limits. Plus, no other country is growing at India’s pace or offering as many opportunities. So, honestly, there’s little need to look outside. Indian investors are becoming savvier, understanding the long-term potential of equity investing. They’ve experienced multiple market cycles, which have improved their behaviour, leading to more inflows. Additionally, higher expected per capita income and savings would support this trend.
All said, India is in a sweet spot in its growth cycle, offering a strong opportunity to generate alpha for a long time.
How much emphasis has the market placed on the rate cuts now?
We have already seen a 100bps interest rate cut, and RBI has shifted to a neutral stance. Markets should not expect much more unless growth slows down or global conditions worsen. With inflation low, maybe a small 25 basis point cut is possible, but the focus isn’t on rates now. The main issue was tight liquidity, which is mostly resolved. Over the next six months, better liquidity should boost credit growth and consumer demand. So, the market is focused more on growth driven by liquidity and easier regulations than on further rate cuts.
Moving forward, what are the key triggers?
Key triggers include growth rising from 6.5% to 7%, which would boost earnings. Any resolution to global issues would improve sentiment and support growth with help from global markets. We’ll also watch consumption trends closely, September and December quarters will reveal if consumption picks up meaningfully, which we expect and hope to see.
