rewrite this title and make it good for SEOFII flows could return in 2026, markets not pricing in the upside yet: Vikas Khemani

As Indian equities move through a phase of consolidation amid uneven global flows, seasoned investors are increasingly leaning on bottom-up stock selection rather than broad market-cap or thematic bets. In a conversation with ET Now, Vikas Khemani, Carnelian Asset Management shared his perspective on PSU banks, IT services, manufacturing opportunities and the outlook for market flows.

On whether public sector undertakings still deserve a place in portfolios, Khemani remained firmly constructive, especially on 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, so we continue to be bullish on the pack.”

The broader debate, however, is whether investors should focus on market-cap allocation or stay stock-specific. Khemani believes liquidity matters for fund managers, but returns ultimately come from earnings visibility and valuation comfort. “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 added that while macro and sectoral tailwinds are important inputs, stock selection remains the core driver. “You need to balance top-down and bottom-up, but if you have to choose one, it will always be bottom-up.”

On the IT sector, which continues to divide opinion amid concerns around artificial intelligence and currency movements, Khemani struck a contrarian note, arguing that fears of 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.” He acknowledged that not all companies will benefit equally, making stock selection critical. “Not every IT company will do well, but the sector as a whole has long legs. Order books and deal wins remain strong.” Manufacturing, according to Khemani, is too broad to be viewed as a single theme and needs to be broken down into specific opportunity buckets.“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.”

On flows, while domestic institutional inflows continue to provide strong support to the market, foreign investor participation has remained volatile. Khemani expects that to improve as global conditions evolve. “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 pointed out 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.”

The overarching takeaway from the interaction is 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.