As valuation-driven market growth eases, future Indian equity returns will depend on actual corporate earnings, according to Carnelian Asset Management. Investors are advised to favor companies showing strong governance and growth rather than broad sector bets.
The Indian equity market is currently in a healthier position than in recent quarters, supported by moderating commodity costs, robust domestic liquidity, and steady credit growth. However, Kuunal Shah, Fund Manager at Carnelian Asset Management & Advisors, suggests that the phase of easy market gains driven simply by rising valuations is largely concluding. Investors now need to focus more on companies that can consistently deliver earnings growth.
Earnings Outlook for FY27
Early business updates for the current period indicate a healthy operating environment across key sectors like financials, automobiles, capital goods, and industrials. Expectations are building for FY27 to potentially surpass the previous year in terms of earnings growth. This optimism is underpinned by the potential for lower interest rates, continued government infrastructure spending, and a sustained recovery in consumption. As these factors play out, market participants may track whether earnings growth broadens across more sectors, which would create a more stable long-term foundation.
Shifting Dynamics in Consumption and IT
In the FMCG sector, the competitive environment is becoming more complex. Large incumbents are seeing increased pressure from direct-to-consumer brands, digital-first startups, and regional competitors. Rather than viewing the sector as a single group, investors are encouraged to look for companies that are successfully adapting to these new consumption patterns.
Similarly, the IT sector has seen valuation corrections that have made prices more reasonable. However, the focus remains on identifying companies that effectively leverage artificial intelligence. Similar to how cloud computing and the internet transformed businesses in the past, AI is expected to be a major factor. The investment approach suggests focusing on individual companies leading in AI integration rather than making broad bets on the entire sector.
Capital Markets and Global Context
Looking ahead, the fundraising pipeline via Initial Public Offerings and Qualified Institutional Placements is expected to remain active throughout the calendar year. While this indicates that many companies are raising money for expansion, the market is becoming more selective. Investors are now applying higher scrutiny to company governance, financial health, and earnings visibility.
On the global front, India is becoming a more prominent destination for emerging market allocations as growth in other regions moderates. While sectors like infrastructure, power, and energy benefit from the ongoing investment cycle, success for investors will depend on selecting companies with clear competitive advantages and reasonable pricing, rather than simply tracking the flow of foreign institutional capital.