High-quality growth stocks better valued vis-a-vis rest of market: Paharia

Paharia points out that sectors like healthcare, telecom, consumer discretionary, and private banks and NBFCs appear attractive currently

Valuations, which have eased over the course of 2025, are likely to soften further as the time correction continues, and earnings growth is expected to pick up, says Vinay Paharia, chief investment officer, PGIM India Mutual Fund (formerly PGIM India Asset Management). In an email interaction with Abhishek Kumar, Paharia highlights that sectors like healthcare, telecommunications (telecom), consumer discretionary, private banking, and non-banking financial companies (NBFCs) currently appear attractive. Edited excerpts: 

What is your equity market outlook for 2026, and what are the key triggers to watch out for? 

Several triggers warrant attention. First is the global artificial intelligence (AI) rally. Any reversal in the AI trade is likely to have a positive rub-off on India. The narrowing US–Japan rate gap, following the Bank of Japan’s rate hike, raises the possibility of a yen carry trade unwind, which could influence global liquidity flows. Domestically, heavy primary market activity may cap secondary market gains, while progress on a US–India trade agreement remains a key monitorable after acting as a drag in 2025. 

On fundamentals, earnings growth is expected to rebound sharply after two muted years for Nifty companies. With easing downgrades, improving domestic demand, and policy support, India is likely to remain among the fastest-growing markets globally. We expect some time correction in 2026, which could make valuations and future return potential more attractive. 

Do current valuations leave room for meaningful upside, or will returns in 2026 be largely earnings-driven? 

We believe markets have borrowed some returns from the future. Overall market valuations remain elevated, with low-quality and low-growth companies priced at significant premiums, while high-quality and high-growth companies continue to trade at reasonable valuations. A sideways market trend, coupled with earnings growth in 2026, could result in a reduction in valuations. 

With gross domestic product growth picking up, do you see earnings growth accelerating in 2026? 

While earnings growth was weak over the past couple of years, it is expected to pick up. Corporate India’s performance in the previous quarter has shown improvement, which is likely to accelerate in the near to medium term. Consensus estimates a Nifty earnings growth of around 15 per cent compound annual growth rate over the next two years, led by sectors such as banking, telecom, and commodities.

 

What factors could derail this growth? 

Non-conclusion of the US trade pact could negatively impact the economy. Weaker stock market gains might blunt the wealth effect, potentially leading to weakness in consumption and property markets. Other risks include geopolitical instability, an unwinding of the yen carry trade, continued reduction in India exposure by foreign investors, and any meaningful drawdown in global asset markets.

 

Which sectors are you structurally overweight and underweight in currently? 

Sectors such as healthcare, telecom, consumer discretionary, private banking, and NBFCs appear attractive. Positive themes include quick commerce, online food delivery, organised retail, various internet-based businesses, contract manufacturers, and hospitals.

 

Healthcare stands out due to higher-than-average growth potential and superior return on capital — both structural characteristics — while valuations remain palatable.

 

Telecom now has fast-moving consumer goods-like characteristics, with incremental returns on capital improving sharply. Future growth is likely to be driven by pricing and mix increases amid rising data consumption.

 

Consumer discretionary, including many new-age companies, also appears attractive given strong structural growth potential, high operating leverage, and low capital intensity.

 

Contract manufacturers across electronics, pharmaceuticals, and other manufacturing segments are well placed to benefit from global supply-chain diversification by US companies. Government support through the production-linked incentive scheme further enhances the sector’s appeal.

 

After a muted year return-wise, should investors raise equity allocation? 

Time correction — where markets remain flat while intrinsic value compounds — can make valuations increasingly attractive over time. In such phases, returns are not lost but deferred. However, any change in asset allocation should be made in consultation with a professional investment advisor and aligned with an individual’s financial plan.