The equity market has remained range-bound in recent weeks. What's holding back the next leg of the rally — persistent global uncertainties or valuations and earnings growth expectations offering limited room for upside?
From a long-term perspective, equity markets average a real return (that is, return above inflation) of 5-7 per cent, and by that metric, we are in the fair-value range. Hence, we should expect markets to deliver similar returns over the next 3-5 years. We believe the setup is constructive for the next couple of years as nominal GDP is picking up and the currency is relatively cheap.
The key risks stem from global factors, particularly a disorderly rise in long-term bond yields and a steep correction in artificial intelligence (AI)-themed stocks.
While domestic fundamentals remain supportive, markets are also assessing whether the extraordinary AI-driven rally globally can sustain at the same pace. Any moderation in that theme could influence global risk appetite and fund flows.
What factors are likely to drive equity markets in the coming months?
The biggest theme driving global markets over the last two years has been AI. Whether that rally continues will depend on how data centre capital expenditure (capex) is executed and how quickly AI applications see broader adoption.
If the AI theme witnesses a meaningful correction, global capital could start rotating towards markets like India, which offers a stable earnings growth story, supported by resilient economic growth and reasonable valuations.
Which sectors are best positioned to do well, going forward? Are there any sectors where you remain cautious?
We feel domestic sectors that have gone through a time and price correction are more attractive at this stage. This includes banks and non-banking financial companies (NBFCs), insurance and real estate. We are cautious on global-facing sectors, like metals and select industrial, and consumer stocks due to high valuations.
Real estate continues to be an attractive domestic theme, with leading developers trading at reasonable valuations and benefiting from strong underlying demand.
Within manufacturing, we remain positive on the long-term opportunity but would be selective where valuations have become excessive.
The June-quarter earnings of several IT companies have been positively received by the market. Do you believe the sector has turned a corner?
The valuations are attractive for sure and the absolute downside looks limited. However, we are not heavily overweight as the extent of disruption from AI is unclear and there are concerns about a slowdown in the global economy. We do believe largecap IT offers better risk-reward relative to several midcap peers, given the valuation gap. However, the long-term impact of AI on traditional IT services remains uncertain, warranting a balanced approach.
What are the key risks that equity markets face at this juncture?
The risk is that if an AI slowdown and high fiscal deficits globally tighten financial conditions, then the Indian market may be affected along with global markets. The other risk is if the West Asia conflict escalates significantly again, oil prices may become a headwind for the Indian economy. A sustained rise in global bond yields or a sharper-than-expected correction in AI-linked stocks could further tighten financial conditions and weigh on risk assets globally.
Broader markets have significantly outperformed since April. Do you expect this trend to continue?
In the near term, there may be a bounce back in largecaps as we believe there is a good chance of foreign flows turning positive. Over the long term, we believe good smallcap funds can outperform headline market indices.
If foreign investors increase allocations to India, largecap stocks could benefit first due to their liquidity and benchmark representation. Over longer periods, however, quality smallcap businesses can continue to outperform through superior earnings growth.
What are your June-quarter earnings expectations? Do you expect FY27 earnings to reach double digits?
Yes, with nominal GDP growth picking up and rupee depreciation also providing a tailwind, we expect FY27 earnings growth to be in double digits. Domestic sectors, such as financial, insurance and real estate, should continue to support overall earnings growth. Provided there is no major external shock, the earnings outlook remains constructive and supportive of double-digit growth expectations for FY27.
 "Manish Gunwani, Chief Investment Officer (CIO) – Equity, Bandhan AMC")