FY26’s hottest investment theme? SAMCO Mutual Fund CEO Viraj Gandhi says consumption is a must-watch

In this chat with ET Markets, he also talks about 2 other promising sectors – private sector banks and pharma. Edited excerpts:

What is your outlook on equity markets for the next 12–18 months, considering global uncertainties and domestic growth trends? Is this the time to buy the fear?

Equity market outlook for the next 4-6 quarters would highly be influenced by a mix of global uncertainties and improving domestic growth. On the global front, trade tensions, especially the potential imposition of reciprocal tariffs by the new US President on different countries in early April, may invite short-term volatility and uncertainty in equities. Domestically, the outlook appears to be more positive. Recent improvements in macroeconomic data, such as inflation dropping to a seven-month low of 3.61%, driven by easing in food inflation, suggest that the worst of the inflationary pressures may be behind us.

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The proactive approach of the RBI towards injecting liquidity and higher government spending are expected to support economic growth, gradually supporting corporate earnings. While the Indian equity markets have faced substantial selling by the Foreign Portfolio Investors (FPIs), the correction provides opportunities for long-term investors, especially in the large-cap segment. The domestic growth drivers offer a favorable backdrop for Indian equities in the next 12–18 months.

With interest rate cycles shifting globally, how do you see Indian markets reacting in the near term?

With the RBI cutting the Repo rate this February, Indian markets are likely to experience some ease in volatility with shifting global interest rate cycles. The US Fed’s decision to keep rates steady and its signals of potential rate cuts in 2025 could lead to increased capital inflows into emerging markets, including India. The Fed has also acknowledged an increase in inflation which could be a result of the new President’s reciprocal tariff regime.

This might support the Indian rupee and help ease inflationary pressures. However, any global uncertainties or fluctuations in the US dollar (USD) could still lead to mixed market sentiment. While foreign capital inflows could strengthen India’s financial markets, higher global uncertainty could also create challenges, affecting market sentiment and capital flows.

Which sectors do you believe hold the most promise for long-term investors, and why?

Several sectors hold significant promises for long-term investors, driven by both domestic economic factors and global trends. One such sector is consumption, which is poised for growth, particularly following the tax cuts announced in the Budget.

By putting an additional Rs 1 lakh crore into the hands of India’s urban middle class through these tax cuts, the government has boosted disposable income, which may increase spending. Given the recent slowdown, these tax cuts provide an opportunity for a consumption revival. As middle-class consumers have more money in hand, sectors like FMCG, travel, apparel, and restaurants are likely to see an uptick in demand, offering substantial growth potential for investors with a long-term horizon.

Another sector that holds considerable promise is private sector banks. Despite their recent underperformance relative to the broader market, private banks are poised for long-term growth, especially given the comfort in valuations.

The sector’s strong fundamentals together with the ongoing race towards India’s financial inclusion, make it an attractive area for investors looking for stability and growth. With geopolitical volatility, particularly in global markets, private banks in India benefit from a relatively more stable domestic environment.

The pharma sector is another area where investors can find promising opportunities, driven by both domestic and global factors. The ongoing China+1 strategy, which has gained traction due to the escalating US-China trade tensions, positions India’s pharmaceutical sector advantageously. India being a global leader in generic drug manufacturing, benefits from strong research capabilities and cost efficiencies.

The sector is poised to produce high-quality medicines at competitive prices, making it a critical player in global healthcare.

How do you approach asset allocation in a volatile market scenario to ensure consistent returns for policyholders?

With decent benchmark corrections along with factors such as FPIs being a recurring net seller, and ongoing global geopolitical tensions, it becomes crucial for investors to take a balanced approach. An effective way of doing this is by investing in multi-asset allocation funds, as they provide exposure to various asset classes such as equity, debt and commodities, especially gold and silver.

The diversified approach offered by multi-asset funds helps mitigate risks associated with investing in a single asset class. These ensure risk management by dynamically adjusting the allocation based on prevailing market conditions. In times of high volatility, the fund manager may reduce equity exposure and increase allocations to safer, more stable assets like debt or gold, ensuring that investors are not overly exposed to market fluctuations.

What are your expectations from the Q4 earnings season? Do you believe the worst of the downgrades is behind us, and are we now entering a phase of gradual earnings recovery and growth?

We believe that we are still 1-2 quarters away from a phase of gradual earnings recovery. The improvements in inflation data dropping to a seven-month low of 3.61%, driven by a decline in food inflation, suggest that the worst of the inflationary pressures may be behind us.

Rural demand is expected to improve, which is aided by the healthy output for most Kharif crops and the favorable outlook for the ongoing Rabi season. Furthermore, the multiplier effect of the personal income tax cut is yet to be accounted for, which could improve earnings for consumer companies in the coming quarters. The evolving global uncertainties with tariffs as a threatening tool could act as a hurdle for earnings growth in this quarter.

Retail investors have learned an old lesson the hard way – respecting valuations. Is this how high valuations typically correct in different market cycles?

The equity markets have always reverted to mean whenever there are extreme valuations, and this time was no different. The mid and small cap valuations had run up considerably and September 2024 was the turning point, which was the same.

The Nifty100/Nifty500 ratio has reached an all-time low level. Additionally, the Mid-cap and Small-cap index both are trading way above median PE ratio which is indicative of the fact that even though both the indices have witnessed correction from their highs, they are expensive. Looking solely at valuation in isolation isn’t fruitful in nature. Valuation along with the industry growth rate is a better metric to look at.

As we step into FY26, do you think that consumption could be the biggest theme given lowering of interest rates and income tax rate cut. FPIs have been selling across sectors, including consumption. Is that an opportunity for domestic investors?

As stated earlier, Consumption may emerge as one of the biggest themes, considering the recent changes in the economic environment, such as the lowering of interest rates and the income tax rate cuts. The budget definitely increased disposable income for India’s urban middle class by putting an additional Rs 1 lakh crore in their hands through relief in the income tax rates. This, combined with other fiscal measures like higher capital expenditure, could stimulate robust household consumption and economic growth in the coming year.

At the same time FPIs have been selling across multiple sectors, including consumption. This represents a potential opportunity for domestic investors. While FPIs have been pulling back, their exit could provide domestic investors with attractive valuations in consumption stocks. Since consumption is likely to be a key driver of the economy, domestic investors with a long-term perspective may find this opportunity to invest in sectors that are expected to benefit from increased consumer spending.

Do you think that investor opinion towards quick commerce companies can also turn more positive in FY26 as cash burn and competitive intensity slows down?

Investor sentiment towards quick commerce companies could indeed turn more positive in FY26, especially as cash burns and competitive intensity begin to take a breather. Quick commerce has tapped into the evolving consumer behavior and shifting demographics, with the core appeal being its unparalleled convenience across the entire spectrum of generations. Consumers, particularly in urban areas, have embraced this model for fulfilling last-minute needs, and the demand for such services shows strong potential for further growth.

Surprisingly, India’s quick commerce market has surged by 156% annually in the past two years, demonstrating the wholehearted adoption. This expansion has primarily been concentrated in metro markets, where 70-75% of dark stores are located. Grocery accounts for the majority of the quick commerce basket.

However, the competitive landscape in this space is undeniably heating up. E-commerce giants like Amazon and Flipkart have entered the quick commerce domain, increasing the intensity of competition.

Existing players like Zomato and Swiggy have also been aggressively investing in scaling their operations, with Zomato committing an additional Rs 500 Crore into Blinkit and Swiggy widening its losses due to increased investments in dark store networks.

Despite these challenges, the market remains optimistic, and the FOMO on another growth opportunity – similar to what happened in the food delivery space – continues to drive competition and innovation.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)