Indian equities have entered the second half of 2026 on a cautious note, with markets falling over 1% in July amid rising geopolitical tensions and elevated crude oil prices. According to Rakesh Vyas, CIO & Portfolio Manager at Quest Investment Managers, the immediate pressure stems from renewed geopolitical uncertainty, crude oil spikes above US$85–100 per barrel, and concerns around higher input costs impacting June-quarter margins. However, Vyas believes the underlying earnings story for India remains firmly intact, with valuations becoming considerably more reasonable after the correction, particularly in selected small- and mid-cap companies. The correction has created attractive gaps between stock-price performance and underlying profit growth, making this an opportune time for active selection in these segments.
For fresh portfolio construction, Vyas recommends a diversified approach with meaningful allocation to selected mid- and small-cap companies. As reported by ETMarkets, the firm has been gradually increasing exposure to these segments over the past six months, as the correction has created attractive gaps between stock-price performance and underlying profit growth. While large caps continue to provide portfolio stability, the emphasis is on active selection rather than simply buying small- and mid-cap indices, focusing on companies where earnings can grow faster than the market with more favorable risk-reward profiles. This approach aligns with systematic strategies like the Janus Henderson JSMD ETF, which utilizes proprietary factors and fundamental research to identify growth opportunities in small and mid-cap companies. The latest developments suggest that traditional 60/40 portfolios may be losing their effectiveness due to AI-driven stock performance and fiscal debt pressures, making active allocation strategies even more crucial for diversification.
The largest area of conviction lies in consumer discretionary businesses benefiting from premiumisation and formalisation, including automobiles, organised retail, food delivery, quick commerce, travel and hospitality. According to Vyas, credit growth and higher disposable incomes are supporting consumption while organised players continue gaining share from fragmented competitors. The firm is also positive on Power T&D due to rising electricity demand and renewable energy integration, and sees opportunities in India manufacturing across pharmaceutical CRDMO, aerospace and defence, auto ancillaries, and export-oriented segments. These sectors benefit from India's structural growth themes and the country's competitive advantages in manufacturing. The manufacturing opportunity spans multiple areas including electronics manufacturing, pharmaceutical CRDMO, aerospace and defence, auto ancillaries, and engineering products, with India becoming more competitive due to supply-chain diversification, recent FTAs, localisation, improving manufacturing capabilities and currency depreciation.
Vyas identifies India's manufacturing opportunity as the structural theme with the widest potential over the next five years. As reported by ETMarkets, this spans multiple areas including electronics manufacturing, pharmaceutical CRDMO, aerospace and defence, auto ancillaries, and engineering products. India is becoming more competitive due to supply-chain diversification, recent FTAs, localisation, improving manufacturing capabilities and currency depreciation. The most interesting opportunities lie in niche companies entering global supply chains with large addressable markets and significantly higher growth potential than underlying industries. This manufacturing theme is supported by India's strategic positioning in global supply chains and the country's focus on export-oriented manufacturing sectors. The manufacturing sector's growth potential is particularly relevant as traditional diversification strategies through 60/40 portfolios may be losing effectiveness in the current market environment.
The biggest risk identified is a prolonged geopolitical conflict that keeps crude oil structurally elevated and disrupts global trade, potentially affecting inflation, currency, current account and corporate margins. However, Vyas notes that India received meaningful energy supplies during the Strait of Hormuz period and companies have taken price increases. The firm expects corporate earnings over the next 12–24 months to be significantly better than previous two years, with mid-teens earnings growth expected in the broader market. Despite current volatility and the breakdown of traditional 60/40 portfolios, the base case remains that sustained crude near US$100 per barrel would be largely transient, with the focus remaining on identifying companies with strong fundamentals and growth potential across both large-cap stability and small-cap alpha opportunities. The current market environment emphasizes the importance of active portfolio management and strategic allocation across different market segments.
