Krishnan VR, the head of quantitative research at Marcellus Investment Managers, finds it difficult to predict how the Indian stock market may perform in FY27, thanks to the global uncertainty, especially the US-Iran war. In an interview with Mint, Krishnan said the knock-on effects of higher energy prices on FY27 earnings growth will be visible over the year. Krishnan also shared his views on sectors like IT and defence, and an ideal equity investment strategy at this juncture. Edited excerpts:
How do you see the Indian market’s performance in FY26?
Large and small cap segments ended in the negative over the last year, while the midcap index delivered single-digit returns.
I think this performance is reasonable given we were coming off the high valuation base in late 2024 and higher than normal disruption first due to tariffs in the first half of the financial year (H1FY26), fiscal and monetary loosening and finally the energy shock we are facing now due to war.
Return dispersion increased across stocks while market breadth came down compared to the previous two fiscal years.
Domestic SIP flows have held up well, countering the heavy selling by foreign investors and smoothing out market volatility to some extent.
Do you expect FY27 to be better in terms of returns and earnings growth?
It is difficult to predict the market outlook for FY27 given the geopolitical uncertainties due to the ongoing Iran war.
Assuming the war situation and energy prices normalise quickly from here, I think it would be reasonable to expect better returns in FY27 as valuations at the aggregate market level now look more reasonable after the 10% or so year-to-date correction we have seen.
If we see extended disruption to energy supply and higher prices, then the knock-on effects on FY27 earnings growth will be visible over the year.
What should be our equity investment strategy at this juncture? What are the areas of opportunity that can maximise our gains?
Investors can consider investing preferably through SIP or STP to average down their purchase price or rebalance their portfolio, as Indian equity valuations have somewhat normalised after the correction year to date.
I think a wait-and-watch, quality-first approach is still warranted for domestic equities, given the scale of disruption to India’s oil and gas supply and attendant impact it can have on inflation and energy costs.
With this perspective, one can consider strong businesses available at reasonable valuations within healthcare, pharma, export-led manufacturing names and broader financial services.
Diversification into global equities should also be considered, given the lack of enough opportunities within Indian equities currently to play certain themes like AI, high-end manufacturing, among others.
Have the recent geopolitical conflicts and crude oil price volatility deteriorated India’s macroeconomic outlook?
The ongoing Middle East war has raised growth and inflation risks. India imports nearly 80% of its energy requirements; hence, nearly every sector is affected either directly due to higher energy costs or indirectly due to higher freight and packaging costs.
Risks of imported inflation have increased with the rupee having depreciated around 10% against the dollar over the last year, which would make it among the worst fiscal year drops since the taper tantrum episode in 2013-14.
I think RBI could tighten monetary policy stance if inflation increases over the coming months, and especially if there is no resolution to the conflict over the next month or so.
If the government chooses to bear most of the impact of higher oil prices by reducing excise duty or any other such measure, then there is a risk of fiscal slippages.
Is the IT sector a value buy now? How should we approach this sector?
Even though most companies in the space reported stable Q3 results, the demand environment remains uncertain. Within IT services, investors should be careful about exposure to BPO or pure software development, as these are among the few areas which can be disrupted relatively easily by current Gen-AI systems.
Given the rapid pace of capability improvements in foundational LLM models seen over the last few years, I think the market will be wary of the terminal value of most IT services business models, and hence, investors should not be anchored by historical valuations.
Near-term earnings outlook may not be a driver of IT services stocks unless several IT companies were to guide for a decent pick-up in revenues in the next 1-2 quarters.
How do you see the defence sector? While the long-term outlook still appears positive, do you find the narrative overblown?
Increased defence capital spend and focus on indigenisation appear to be structural multi-year themes now, given the proliferation of new technologies and the imperative to reduce import dependence due to geopolitical uncertainties.
While there are pockets of opportunities, valuations of many companies in the sector are still stretched.
Defence projects typically have longer gestation periods, and most companies are completely reliant on the government’s defence spend. Hence, a cautious, valuation-aware approach is warranted.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.