'FY27 Presents Clear Runway For Earnings Improvement'

'In investing, poor sentiment is always a good vintage to build a portfolio.'

As markets navigate the developments in West Asia, Vikas Khemani, founder and chief investment officer at Carnelian Asset Management and Advisors, tells Puneet Wadhwa/Business Standard in an e-mail interview that emerging markets should see renewed allocation as interest rates in the US stabilise and potentially soften.

Where do you see money-making opportunities for investors amid the ongoing geopolitical developments?

Every few years, markets offer a similar setup, and the current one is quite similar to 2022 post-Ukraine war.

The overall environment over the last 12 months has been clouded by global conflicts over trade and military issues, which has led to heightened volatility and a significant market correction.

However, fundamentally, the tailwind of fiscal stimulus in the form of income tax and goods and services tax rate cuts and monetary policy is helping the revival of demand, credit, and corporate profit.

Valuations have corrected significantly, especially in the mid- and smallcap space.

In investing, poor sentiment is always a good vintage to build a portfolio. We believe that, just like the 2022 vintage of investments is still doing well, the current vintage of the portfolio is likely to do well over the next 12-18 months.

Of course, there is no alternative to finding good-quality companies with a sound management team through a disciplined approach to generate superior return outcomes.

Where is one likely to find the next set of compounders?

The pharma and CDMO (contract development and manufacturing organisation) space stands out as a key area of opportunity.

Global pharmaceutical companies are increasingly outsourcing research, development, and manufacturing to manage costs and diversify supply chains, and Indian players are well-positioned to benefit from this structural shift.

The automobile and auto ancillary sector is another area with improving visibility.

A gradual recovery in the commercial vehicle cycle, continued premiumisation in passenger vehicles, and growing export opportunities are supporting earnings momentum across select companies in this space.

The BFSI (banking, financial services, and insurance) sector is well-positioned to benefit early from improving macro conditions.

With interest rates trending lower and liquidity conditions easing, credit growth is likely to accelerate across retail, SME (small and medium enterprise), and corporate segments.

Finally, manufacturing and capital goods companies with strong order books, execution capabilities, and healthy balance sheets are likely to benefit from India's ongoing capital expenditure cycle.

'EMs should see renewed allocations'

Can China/other EMs garner more foreign money as compared to India?

India underperformed certain EMs, particularly China, which saw allocation shifts after being relatively much cheaper in valuation.

During a period when EMs as a whole saw limited incremental inflows, portfolio managers rebalanced from India (then overweight) to China.

As US interest rates stabilise and potentially soften, EMs should see renewed allocations.

The valuation gap between India and China has also narrowed. India's structural growth, policy stability, and domestic liquidity resilience position it favourably.

How do you see the earnings cycle play out in the financial year 2026-2027 (FY27)?

Earnings expectations were trimmed during 2025 amid global uncertainty and tariff concerns. However, earnings did not contract; they merely moderated.

We are already witnessing early signs of recovery. I view this more as a reset than a structural slowdown.

As macro conditions improve, particularly with credit growth strengthening and operating leverage kicking in, earnings momentum can reaccelerate.

From our analysis, FY27 presents a clearer runway for earnings improvement.

With valuations no longer stretched and interest rates easing, the earnings cycle appears poised for gradual acceleration.

Any dark horses that deserve a rerating from here on out?

The 'dark horses' are often found in mid-sized companies quietly gaining market share without excessive narrative attention.

Historically, structural rerating comes from sustained return on capital improvement rather than thematic excitement.

'Selective IT services companies could present a contrarian opportunity'

Is the information technology a contrarian bet from a 12 to 18 month perspective?

Caution around IT stems from fears of AI-led disruption and global slowdown. I take a different view. Every technological transition from Y2K to ERP to cloud migration expanded the addressable market for Indian IT services.

AI implementation at enterprise scale will require data organisation, integration, tool selection, and deployment roles well suited to established IT firms.

Order books remain healthy. While stock selection is critical, writing off the sector would be premature.

Selective IT services companies with strong digital portfolios, diversified clients, and disciplined cost structures could indeed present a contrarian opportunity.

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Feature Presentation: Aslam Hunani/Rediff