'The outlook for the next Samvat is more constructive, as many of the earlier drags are gradually becoming supports.'
It's been a testing first half of 2025-2026 for Indian equity markets.
Mahesh Patil, chief investment officer at Aditya Birla Sun Life Asset Management Company, tells Puneet Wadhwa/Business Standard in an e-mail interview that the outlook for the next Samvat (which marks the start of a new financial year according to the Hindu calendar) is looking more constructive.
Do you think the bull run in Indian equities is coming to an end as they face headwinds from US tariffs, sluggish earnings and high valuations?
The past year certainly raised doubts about the bull run, given sluggish earnings, trade tariffs, geopolitical risks, and a restrictive monetary policy.
Indian markets underperformed both global and emerging market peers, and valuations looked stretched.
However, most of these headwinds are now easing, and the market is entering a healthier phase.
Over the next 12 months, we expect earnings growth to align more closely with nominal GDP growth of 10 to 12 per cent.
The outlook for the next Samvat is more constructive, as many of the earlier drags are gradually becoming supports.
Have the markets run ahead of economic fundamentals?
Over the long term, Indian equities have largely tracked the trajectory of economic growth.
Post-pandemic, however, markets sprinted ahead of the broader economy, creating a visible gap between total market capitalisation and GDP during 2021-2022 to 2023-2024 -- reaching 30 per cent at its peak.
The consolidation of the past 12 to 15 months has narrowed that gap meaningfully, though a residual divergence of 6 to 7 per cent remains. This isn't unusual.
Markets tend to move ahead in anticipation of future growth, while the real economy adjusts with a lag.
As India sustains real GDP growth of 6 to 6.5 per cent (about 10 per cent nominal), we expect this remaining gap to close over the next three to six months as economic activity catches up.
Looking ahead, the medium-term outlook remains encouraging. Domestic growth drivers are intact, and any easing of external headwinds -- such as tariffs or trade frictions -- could accelerate momentum.
In such a scenario, markets may once again price in optimism and move slightly ahead of the underlying economy.
In essence, while short-term gaps appear from time to time, the correlation between equities and economic growth in India has remained strong, and we expect that alignment to continue over the next two years.
IMAGE: Mahesh Patil.
Photograph: Kind courtes, Aditya Birla Sun Life MF
Flows into equity schemes are thinning, and the pace of new demat accounts has slowed. How do you read this trend?
What we're seeing isn't an exit from equities, but a healthy normalisation.
Retail investors, who had aggressively ramped up equity allocations after the pandemic, are now balancing portfolios as other asset classes like fixed income, gold, and silver deliver strong returns.
This diversification is natural and prudent -- it reduces concentration risk and smoothes volatility.
Investor behaviour has also matured over the past five years.
Many are now investing with three- to five-year horizons instead of reacting to short-term market swings.
Equity ownership as a share of household savings has nearly doubled in the past seven years, from 3 to 6 per cent. This structural trend of rising participation in equities remains intact.
So the current moderation in flows shouldn't be mistaken for weakness.
Equity mutual fund flows remain steady and healthy, more than enough to absorb new supply from fresh issuances.
Essentially, the euphoria of the past three years is cooling off into a more sustainable, long-term participation phase.
What were your investment hits and misses over the past year?
Turning overweight on large private banks early this year worked well.
We also took a contrarian bet on insurance last year after regulatory headwinds, and that recovery has played out steadily as industry growth improved.
Domestic pharmaceuticals and healthcare -- especially hospitals and diagnostics -- were other strong contributors.
On the flip side, our early contrarian call on information technology (IT) services hasn't delivered yet.
Global uncertainties and tariff concerns kept the sector under pressure.
That said, much of the downside seems priced in, and lower US rates could revive discretionary spending.
Looking ahead, contrarian opportunities exist in metals, where China's policy shifts are improving the outlook, and in consumer staples, which could benefit from softer commodity prices, rate cuts, and goods and services tax reductions. Both sectors, along with IT, could surprise on the upside over the next year.
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