Manufacturing, Exports and Banking Present Strong Investment Themes as Valuations Correct, Says Axis Mutual Fund CIO

The Indian equity market is seeing an improved outlook as valuations correct from previous highs and earnings growth is supported by higher nominal GDP growth. According to R Sivakumar, CIO of Axis Mutual Fund, stocks faced high valuations and decelerating earnings through fiscal years 2025 and 2026, but momentum is shifting toward more normal double-digit growth for the economy.

Revenue and earnings growth remained robust in the first quarter of fiscal year 2027 despite geopolitical pressures such as the US-Iran conflict. Economically, India moved into double-digit nominal GDP growth during the March quarter of FY26 and the June quarter of FY27, bouncing off a 23-year low outside of the Covid year. With CPI inflation accelerating, real GDP growth is translating into 11 to 12 percent nominal growth.

At the index level, valuations have moderated. The Nifty's valuation has decreased from roughly 24 times earnings down to about 18 times, while earnings have begun to accelerate. This adjustment makes the Indian market more competitive globally, particularly as doubts emerge regarding the profitability and capital intensity of the artificial intelligence boom in other international markets.

However, market dynamics vary across capitalizations. While large-cap sectors like banking, IT, consumer stocks, and oil and gas have experienced valuation cool-downs, mid-cap and small-cap segments have continued to run up based on specific earnings growth. Pockets of froth remain, particularly in speculative themes tied to global trends where underlying demand or orders have yet to materialize.

On the external front, rising US Treasury yields driven by robust economic growth and inflation do not inherently threaten risk assets, though they increase the cost of capital for businesses. For foreign portfolio investors to return sustainably, India will need to demonstrate consistent double-digit GDP growth and competitive earnings relative to peers like Korea, Taiwan, and Japan. Tax rates are secondary to fundamental returns and growth.

Retail investor inflows through mutual funds have remained steady, primarily directed toward mid-cap, small-cap, flexi-cap, and multi-cap funds, rather than providing an exit for foreign institutional investors selling large-caps. However, external deficits and net negative foreign direct investment continue to place pressure on the currency, highlighting the need for sustained long-term capital inflows.

Looking ahead, key investment themes center on manufacturing, exports, and banking. Manufacturing is benefiting from domestic demand and export tailwinds, supported by free-trade agreements and rupee depreciation. Meanwhile, the banking sector exhibits strong fundamentals, with credit growth accelerating to 18 to 19 percent, asset quality near multi-decade highs, and stable net interest margins. Both public and private sector banks present value opportunities within an otherwise elevated market.

Investors experiencing a period of sideways market consolidation are advised to maintain strict asset allocation discipline. While near-term volatility is expected, medium- and long-term fundamentals remain stable for active managers who focus on earnings visibility and business execution rather than short-term market noise.

"The transition from single-digit to double-digit nominal GDP growth marks a critical turning point for the Indian corporate ecosystem. As valuations moderate from previous cyclical peaks, investors must look past speculative market froth and focus on companies with proven execution capabilities. Sectors like manufacturing, banking, and export-oriented businesses present genuine fundamental strength, making disciplined asset allocation and active management essential for long-term wealth creation in the current market environment." — Dr. Shishir Gupta, Founder & CEO, StartupLanes