Business
Axis Mutual Fund’s Shreyash Devalkar bullish on these 4 sectors as earnings cycle turns
Edited excerpts from a chat:
The year 2025 saw supply pressure from IPOs and promoter selling absorb a bulk of domestic demand. Do you think the new year would see similar supply-side pressure leading to subdued returns?
After a couple of strong years for the primary market, a phase of moderation seems inevitable. Nearly 100 IPOs have hit the market in 2025 alone. As per media reports, there is already a strong pipeline. The supply has affected returns, however, on the flip side it also helps in normalizing excesses in the valuations in overall listed space, along with providing opportunity to invest in businesses which were not available in the listed space.
What is the kind of earnings expectations that you are banking on for the market across major sectors for Q3? Would it be better than Q2?
We believe earnings have bottomed out, and the trajectory from here looks more constructive. While it may take a few quarters for the upgrades to start showing up, the pace of earnings downgrades has already slowed, signaling stabilization. The bulk of incremental growth could be broad based from autos, financials, power, and consumer sectors, supported by a low base effect and favorable policy measures. Early signs of recovery are visible in domestic consumption plays—autos and some discretionary segments, aided by volume upticks following recent GST rate cuts and the resulting operating leverage.
What is the market’s expectation from the Budget? Are we going to see higher allocation towards rail and infra? There has been a clear push towards consumption rather than capex-led growth in the last one year.
In 2025, the government’s reform agenda clearly leaned towards boosting consumption. Measures such as lowering income tax rates and rationalizing GST have enhanced disposable income, encouraging higher spending across segments. These steps have provided a much-needed lift to demand at a time when growth impulses were uneven. Beyond fiscal tweaks, structural reforms like the implementation of labour codes signal a long-term commitment to improving workforce conditions and productivity. Notably, two of these key reforms were introduced outside the budget cycle, underscoring the government’s intent to revive weaker areas of the economy proactively.Looking ahead, the market will watch with continued impetus for capex-led growth in the upcoming budget. Investments in infrastructure and manufacturing have the potential to complement consumption-driven momentum, creating a virtuous cycle of demand and job creation. In essence, consumption and investment must move in tandem for sustainable economic recovery. Government, RBI, and regulators have been taking policy actions both on budget and during the year.
The pain in smallcaps as well as select midcaps has been troubling a lot of portfolios. Do you see the market improving for them incrementally in the next few quarters?
Historically, midcaps and smallcaps have delivered sharp rallies during bullish phases, which explains the current bout of pain—these segments had run up significantly over the past few years, leaving valuations stretched and vulnerable to corrections. Part of the pain has been due to the substantial valuation re-rating. Post time correction and absolute correction, selectively, valuations are getting in place. Bulk of large caps by weight have grown at a slower pace hence are relatively reasonably priced, supported by stronger balance sheets and predictable earnings. Mid and small caps, on the other hand, often command premium valuations because of their higher growth potential, but that also makes them more sensitive to liquidity conditions and sentiment shifts. Going forward, as market confidence builds and earnings visibility improves, we believe stock selection will play bigger roles in returns than allocation based on market cap.
Which sectors of the market are you bullish on for the next one year?
While bottom-up stock picks around popular themes remain expensive, underperformers due to slower growth with relatively attractive valuations offer selective opportunities. Stock picking with a focus on growth at reasonable valuations will remain the cornerstone of performance, with a clear preference for domestic-oriented sectors over export-heavy plays. We maintain an overweight stance on consumption. The positive impact of GST rationalization is seen across consumer discretionary companies who have reported strong festive-season sales. We also remain constructive on other consumer discretionary plays—especially in retail, hospitality, and travel & tourism—which are gaining from strengthening domestic momentum. In automobiles, the trend toward premiumization is expected to strengthen, supported by a pickup in the replacement cycle. Recent consumption numbers and management commentaries suggest that consumption sector has gained post GST rationalization however we need to watch out for continuity in revival needs to be seen in coming months.
We have increased exposure in financials over the last year as these are well-positioned to benefit from expected revival in credit demand and improved liquidity conditions. Furthermore, we are overweight in Healthcare. We are underweight in IT given the cautious environment in the US although rupee depreciation and attractive absolute valuations are enticing, relative valuations vis a vis global peers are still expensive. Additionally, we are positive on structural themes such as renewable capex, power transmission and defense.
What are the risks that investors need to be mindful of as they step in 2026?
I believe risks don’t change with the calendar year—they remain constant in nature. Among them, the most significant is what I call behavioral risk. Markets are inherently unpredictable and rarely move in a straight line; volatility is part of the journey. Investors often underestimate this behavioral aspect, which can lead to impulsive decisions during market swings. To build a meaningful corpus over time, it’s essential to maintain patience, optimism, and a disciplined long-term vision. Staying invested through cycles, resisting the urge to time the market, and focusing on goals rather than short-term noise are critical to success. Ultimately, wealth creation is less about chasing returns and more about managing emotions and adhering to a well-thought-out plan.
