In this edition of ETMarkets Smart Talk, Mohit Khanna, Portfolio Manager – PMS at PGIM India AMC, says markets are likely to remain range-bound in the near term as investors digest policy signals and corporate commentary.
However, he sees earnings growth accelerating meaningfully in FY27–28 and prefers a bottom-up approach with a constructive stance on mid- and small-cap equities, where growth visibility appears stronger than largecaps. Edited Excerpts –
Q) Thanks for taking the time out. We have seen a rollercoaster ride in markets with wild market swings on either side post-Budget. How do you see markets in the near term?
A) Over the last few weeks, Indian markets have witnessed a plethora of news flows. These include EU-India FTA deal, Union Budget 2026, India-US tariff deal which may lead to a wider Bilateral trade agreement in a month’s time, the RBI’s monetary policy and the 3QFY26 earnings.
Markets need to digest all this; especially the management commentary for the upcoming quarters given during the result season. This may result in sector rotation in the market, making certain pockets volatile.
On the whole, we may not see the markets making any big move either up or downside in the near term.
Q) With the Budget, trade deal out of the way as well as the MPC, what are the next big triggers that D-Street investors can look forward to?
A) All the news is out. Earnings and analyst calls are over. There could be some seasonal data points coming in over the next few weeks related to monsoon and rabi cultivation.
However, investors should remain focused on creating portfolios for the next 5-7 years. Equity investment is a marathon. It is time for good-old bottom-up investing, where margin expansion, earnings & cash flow growth take precedence.
Q) What is your take on the December quarter earnings, which have come through? Are we seeing green shoots?
A) While directionally corporate earnings are looking positive, overall growth-rates are somewhat lower. This is typical behavior of any data point that’s ‘bouncing along the bottom’ and has been in-line with the expectations.
Autos, durables, PSU banks, defense, capital market plays, etc. reported above average growth while infrastructure, select capital goods, export-oriented engineering companies were the laggards.
Having said that, we expect the earnings growth rate to accelerate in FY27 & increase further in FY28. We continue to focus ourselves in the Mid & Small cap equites as their earnings growth over the next two years should be much higher than that of large caps.
Q) Which sectors are likely to remain in the limelight in 2026, post-Budget, trade deal, etc.?
A) Management commentary during the 3QFY26 earnings season highlighted a few important things. We have now started to see some green shoots in consumer demand revival.
In the FMCG, foods and personal care have shown better traction relative to home care. QSR space too has delivered encouraging commentary. Auto (PV, CV, 2W & tractors) have started to see growth; as reported in vehicle registration data.
Construction equipment continues to lag. Export oriented textiles may also benefit as the trade deal & FTA comes into effect.
Q) Any theme that you think looks overheated now.
A) In the last few quarter, Indian markets have witnessed a strong wave of IPOs and FPOs. The excess liquidity in the hands of investors and the greed of making quick ‘listing gains’ have taken valuations of multiple such companies at an very elevated level in some cases. Investors should be watchful in this part of the market.
Q) How should one play the small & midcap theme this year?
A) Even after a strong 6-7% rally in the last few days, Nifty Smallcap 250 index is still down nearly 10% from its 52-week high as on 10th Feb’26. While the Nifty Midcap 150 index have almost fully recovered to its highs.
A lot of investors have missed this recovery due to undue attention to news flows and trying to ‘time the market’. As highlighted earlier, focus should remain on fundamental research with the bottom-up portfolio build-out strategy.
‘Time in the market’ is more important; hence investors should continue their systematic investments in the mid & small cap space.
Q) How are we placed in terms of valuation among other EM players?
A) As on 10th Feb’26, Bloomberg consensus indicates that Nifty 50 (India) is trading at P/E of 20.6x on CY26 estimates. This looks higher as compared to all other emerging markets like for the same period, Shanghai Composite (China) is trading at 15.9x and IBOVESPA (Brazil) is trading at 11.4x.
However, if we look at the historical averages, India is currently trading at its 5-year average multiples. While China & Brazil are trading at +2 standard deviation of their 5-year average valuation levels.
Q) How are FIIs looking at India? We are seeing some buying coming back towards Indian equities.
A) FIIs have been selling Indian equities for a while now. There are three factors in my opinion that are important for their decision making here. Firstly, the difference in the 10-year bond yield between India and the US has been shrinking.
For example, in 2021 & 2022, the Indian 10 year bond yields were higher by 4.5% on an average. This difference has shrunk to nearly 2.5-2.6% as the US yields have strengthen.
Thus, country risk premium is not enough for FIIs to bet on India. Secondly, on a relative basis, other investible markets offered better value. Lastly, India had been facing higher US tariffs over the last few quarters.
US-India deal has reduce the tariff burden considerably and thus we should see some FII inflows in the interim. However, for sustained inflows, the interest rate differential needs to increase.
Having said that, let me highlight that in CY22, FII sold nearly Rs. 1.2 lakh crore in Indian equities but Nifty 500 index delivered total return of +4.5%. In CY24, FII selling almost matched with their buying and Nifty 500 delivered approximately +17% returns.
Similarly, in CY25 FIIs sold nearly Rs. 1.7 lakh crore in Indian equities and the Nifty 500 index was up +6.8%. The Indian markets have definitely come a long way in restricting downside during FII selling and the appreciation for that goes to the Indian retail and institutional investors.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)