As Indian equities navigate through a consolidation phase amid volatile global flows, veteran market participant Vikas Khemani from Carnelian Asset Management believes the groundwork is being laid for a more constructive phase ahead. In his latest interaction with ET Now, Khemani outlined why the coming period could mark a positive shift, with earnings growth, policy support, and improved foreign flows converging to enhance market prospects.

Market Consolidation and Recovery Outlook

After a year marked by muted benchmark returns, Khemani argues the current phase resembles a classic consolidation period rather than a structural breakdown. Drawing parallels to previous market cycles, he noted that similar patterns occurred in recent years. "I think that always happens every couple of years in the market. It is nothing new. If you go back to your memory, in 2022 we had a very much similar situation. 21 was a great year and 22 index was more or less struggling and towards the end it picked up," he explained.

The market expert pointed to supportive macro developments over the past months, including monetary easing by the Reserve Bank of India through rate cuts and liquidity infusion, alongside fiscal stimulus from the government. He expects these policy measures to impact growth with some lag, positioning 2026 favorably for market performance.

Foreign Investment Flows and Market Dynamics

On the critical aspect of foreign institutional investor flows, Khemani expects significant improvement ahead. "DII flows have been very robust, driven by steady SIP inflows. On FIIs, 2026 should be better as US interest rates start coming down and emerging markets attract flows again. The China–India rebalancing trade is largely behind us," he stated.

He emphasized that the resilience shown by Indian markets despite persistent FII outflows is a positive signal. "If FII flows turn positive, the impact could be significant. Markets are not pricing that upside yet, and it could even lead to a rerating."

Sectoral Investment Strategy

Banking and Financial Services

Khemani maintains strong conviction in banking and financial services, particularly PSU banks. "Yes, absolutely. We have been holding PSU banks for quite some time. These are incredible franchises that have seen significant transformation in asset quality, technology and governance. They are very different from what they were 10 years ago. Even today, many of them are delivering 15–18% ROEs and growing reasonably well post consolidation."

Within financials, he continues to prefer larger, well-capitalised players due to their cost of capital advantages in the lending business.

Information Technology Sector

Taking a contrarian stance on IT services, Khemani argued that fears of AI disruption may be overstated. "Every technology transition — from Y2K to cloud — has expanded the opportunity set for Indian IT services. AI is no different. Enterprises will still need IT partners for implementation, data organisation and tool selection. Writing off the IT sector would be a mistake."

Manufacturing and Consumption

On manufacturing, Khemani emphasized the need for selective approach. "Manufacturing spans everything from chemicals and auto components to defence and capital goods. We are positive on select speciality chemicals, auto components, CDMO, capital goods and power ancillaries. These are areas where we see sustained growth over the medium to long term."

For consumption, he remains constructive on consumer discretionary themes, expecting this trend to continue through 2026-27.

Bottom-Up Investment Philosophy

Khemani emphasized his preference for stock-specific selection over broad market-cap or thematic strategies. "Our approach has always been bottom-up. If we see a sustainable 15–20% earnings growth over the next three to five years at a reasonable price, we are happy to buy and stay invested. Short-term underperformance does not bother us if the long-term story is intact."

He estimates earnings growth of around 14-15% for the year ahead, which he views as sufficient to support higher equity prices. The overarching message remains clear: while macro variables and global flows influence sentiment, long-term wealth creation in Indian equities will continue to hinge on disciplined stock picking, patience and conviction in business fundamentals.