FMCG, Auto And Financials Lead Harsha Upadhyaya's Top Picks As Market Sentiment Turns Bullish

The undertone of the market has turned decisively bullish, supported by an improving earnings outlook, easing global risks and more attractive valuations across Indian equities, said Harsha Upadhyaya, CIO–Equity and President of Kotak Mahindra Asset Management Company.

According to Upadhyaya, the second half of the year is expected to show continued improvement in the earnings trend, with further strengthening likely in the next fiscal.

“From a fundamental perspective, the expectation is that earnings momentum will improve meaningfully,” he told NDTV Profit. He also added that globally, there is hope of a favourable geopolitical environment and a potential peace deal.

He also pointed that over the last year, India underperformed, which has helped moderate valuations. All of this adds to the bullish sentiment, and "we expect conditions to gradually improve".

Upadhyaya expects banking and financials to drive the next phase of earnings growth. The sector, he notes, has already demonstrated outperformance despite the market appearing flat in recent quarters. As markets begin to trend higher, he believes financial stocks will continue to outperform.

According to him, financials are best placed to lead the earnings uptrend. Consumption-oriented sectors also look strong, with mid- to high-teens earnings growth. He foresees a broad-based earnings recovery, but banking and financials will be at the forefront.

Despite the improving macro environment, the outlook for FMCG remains muted. Upadhyaya remains underweight on the sector, noting that earnings growth is unlikely to outperform the market average.

He is not very comfortable with valuations here and does not expect the sector to deliver market-beating earnings growth.

Upadhyaya expects consumption to play a central role in driving both the economy and the markets. Structural reforms and improving sentiment are expected to support consumption growth, even if the recovery is not uniform across regions.

“Consumption will be a key driver from here, alongside financials. There is enough structural support for demand to hold steady,” he noted.

The auto sector remains one of Upadhyaya’s preferred themes. Festive season sales showed strong year-on-year growth across most segments. However, he believes the coming months will confirm whether this strength is sustainable.

The key is whether there is follow-through demand. Two-wheelers are outpacing four-wheelers, and the auto sector is well-positioned to continue outperforming, he added.

Upadhyaya remains optimistic that structural reforms will continue to support consumption, lending further strength to the automobile sector.

On valuations, Upadhyaya believes large caps are far better placed than small caps. The stellar small-cap earnings growth seen between 2020 and 2024, where earnings rose over 25%, is unlikely to be repeated. In contrast, large caps grew earnings at 18% CAGR over the same period.

He remains sceptical about a broad-based small-cap rally. Select opportunities may emerge as the economy expands, but investors will need to be highly selective.