India holds the top spot in our EM playbook: Bernstein's Venugopal Garre

Garre tells that improving macro conditions and lower earnings risk make this a good time to start evaluating bottom-up opportunities in quality midcaps

Mid and smallcap stocks took a beating during the market correction earlier this year. Venugopal Garre, managing director and India head of research at Bernstein, tells Puneet Wadhwa in an email interview that improving macro conditions and lower earnings risk make this a good time to start evaluating bottom-up opportunities in quality midcaps. His December 2025 Nifty target is 26,500. Edited excerpts:

 

It has been a choppy year for equities globally. Which camp are you in — the bulls or the bears?

 

Globally, we expect continued volatility as policy uncertainty remains high, particularly with ongoing US-China trade negotiations and shifting central bank stances. The outcome of these talks will influence near-term US inflation and global currency dynamics, especially as China’s excess capacity finds new markets.

 

We maintain a positive bias on India. Its limited direct trade exposure shields it from some global shocks, and as supply chains diversify away from China, India stands to gain export share over time.

 

The domestic macro environment is improving. With a supportive base for the next few quarters, we've shifted from last year’s caution to a more constructive outlook for Indian equities.

 

How do you see the bond markets playing out in the US and India?

 

Bond market movements will largely depend on trade outcomes, fiscal deficits, and inflation expectations in the US. If US-China negotiations make progress, we expect US yields to stabilise near current levels, with the dollar index also finding a floor.

 

In India, strong macro fundamentals and controlled inflation give the Reserve Bank of India room to manage rates independently. Equity foreign institutional investor (FII) outflows in the first quarter of 2025 have reversed since April, and we expect net FII inflows for the rest of the year, helping offset earlier outflows.

 

Where does India stand in your preference list within emerging markets (EMs)?

 

India remains at the top of our EM preference playbook, thanks to resilient growth, robust domestic demand, and ongoing reforms. China-US tensions persist, and most other EM markets have higher trade linkages, increasing their risk.

 

Our Nifty target for December 2025 is 26,500, reflecting expectations of double-digit returns this year. We continue to view India as a standout within EM.

 

Time to cherry-pick within the mid and smallcap segments?

 

After a year of underperformance and a sharp correction, we’ve upgraded midcaps within the mid and smallcap space to ‘neutral’. The valuation premium of midcaps to largecaps has normalised to historical averages. While mid and smallcaps aren’t cheap yet, improving macro conditions and lower earnings risk make this a good time to start evaluating bottom-up opportunities in quality midcaps.

 

One strategy that did well for you and one that backfired in the past six months?

 

Our positive stance on the Nifty and cautious approach to mid and smallcaps worked well. Sector-wise, our overweight on financials and telecommunications and underweight on healthcare were successful.

 

This year has been a stockpicker’s market, so any missed opportunities have been more about individual stocks than sector or market calls.

 

Will corporate earnings gather momentum and justify India’s premium valuation?

 

India’s macro momentum is strong, with 7.4 per cent gross domestic product growth in the January-March quarter and expectations of 10–12 per cent earnings growth over the next two years.

 

A supportive base, improving rural demand, lower rates, and rising investment should drive an earnings recovery. However, sectors with significant export exposure — automotive (auto) and auto components, healthcare, and information technology (IT) — are most at risk of earnings downgrades due to global headwinds.

 

Sectors and stocks that big money is likely to chase in the next few months?

 

We expect domestic institutional investors to drive flows in the coming months. Interest in initial public offerings is likely to increase, given the expected pick-up in primary market activity. Our sector calls for the next few months remain unchanged, with financials, telecommunications, and utilities rated ‘overweight’.

 

What about financials, IT, fast-moving consumer goods (FMCG), and metals?

 

We remain overweight on financials, reflecting improving macro trends and favourable valuations. FMCG has been upgraded from ‘underweight’ to ‘neutral’ as rural demand recovers. We’re ‘neutral’ on IT, with a slight positive bias pending clarity on the US economy and trade developments. Metals remain ‘neutral’.