Vikas Khemani Predicts Financials and Manufacturing Growth in 2026

After a year characterised by market consolidation and mixed sector performance, Vikas Khemani, a prominent figure at Carnelian Asset Management, anticipates a more favourable phase for Indian equities in the upcoming year. In a recent discussion with ET Now, Khemani detailed his perspective on how earnings growth, appealing valuations, and supportive policies may converge to enhance market conditions.

The past year saw India's benchmark indices struggle to provide substantial returns, with several segments of the broader market underperforming. Khemani believes this pattern is not unique. "Market fluctuations occur every couple of years. If you look back, 2022 mirrored a similar situation. After a strong 2021, the index faced challenges in 2022 but rebounded towards the end, followed by promising years in 2023 and 2024, while 2025 was more subdued," he explained.

Khemani interprets the current market phase as a typical consolidation period rather than a sign of deep structural problems. "We are currently in a consolidation year, marked by numerous positive macroeconomic developments," he stated. He cites recent supportive actions, including monetary easing by the Reserve Bank of India (RBI) through interest rate reductions and liquidity measures, as well as fiscal incentives such as income tax and goods and services tax (GST) reductions from the government.

According to Khemani, these macroeconomic factors may influence growth with a slight delay, suggesting that 2026 could see the effects materialise. He noted that earnings growth has already started to improve and is expected to continue strengthening. "We are beginning to see a notable increase in earnings growth, which I believe will only enhance from this point forward," he remarked.

His confidence is bolstered by current valuations and performance relative to other markets. "We are in a market that has not shown significant movement despite earnings growth. India has underperformed compared to other emerging markets this year, and valuations are now at a reasonable level. With declining interest rates, the overall outlook appears positive for 2026 compared to 2025," Khemani added.

As the market transitions into 2026, Khemani identifies several promising sectors. He expresses strong optimism for the banking and financial services sectors. "We maintain a positive outlook on the banking and financial services sectors, as these areas typically benefit from favourable monetary policy," he asserted. Additionally, he is optimistic about consumer-driven sectors. "Since mid-August, we have been positive about consumer discretionary stocks, which tend to follow longer trends, suggesting 2026 and 2027 could be strong years for these sectors."

Khemani also sees potential for a resurgence in manufacturing, which faced challenges in 2025. While he acknowledges short-term pressures from issues such as US tariffs, he believes these obstacles are temporary. "Once these issues are resolved, we could witness a rebound in manufacturing, making 2026 a promising year for that sector, which struggled in 2025," he noted.

On whether markets will await earnings results or act in anticipation of recovery, Khemani highlighted that equities often move ahead of underlying fundamentals. "Typically, the market bottoms out before earnings start to recover significantly. For instance, the market began to recover in mid-April, well before earnings improved in the second quarter," he explained. He predicts earnings growth of approximately 14-15% for the coming year, which he believes will support increased equity prices. "There are no significant structural risks, valuations are down, and interest rates are decreasing. All these indicators suggest a positive outlook for the equity market," he concluded.

In the past year, gold and silver have performed well, benefiting multi-asset investment strategies. However, Khemani warns against assuming this trend will continue. "Gold and silver often see performance in bursts. While I am not an expert in these commodities, it appears that a significant portion of their recent rallies may be behind us," he cautioned. He suggested that if equities perform well while metals stabilise, multi-asset funds may not see the same impressive results as in the prior year. "2025 saw poor equity performance but strong metal performance. If we expect a solid year for equities and less impressive results for metals, the outcomes for multi-asset funds may differ," he explained.

Within the financial sector, Khemani emphasises his preference for larger, well-capitalised companies. "In lending, we favour mainstream large companies due to their lower cost of capital, which is crucial for lenders," he stated. He advises a more tactical approach to smaller entities. "If we consider smaller players, it is typically on a tactical basis rather than a long-term investment," he concluded.