Indian equities have started the second half of 2026 on a challenging note, with markets falling over 1% in July according to ETMarkets. The sharp rise in crude oil following renewed geopolitical tensions in the Middle East has revived concerns around inflation, current account deficit and corporate margins. Elevated US bond yields and a stronger dollar have kept foreign institutional investor flows volatile, while investors have become more selective after the strong rally over the past few quarters. The June quarter earnings season has begun on a mixed note, with strength in manufacturing-led sectors offset by pressure in IT and Oil Marketing Companies.
Siddhartha Khemka, Head of Research, Wealth Management at Motilal Oswal Financial Services, recommends a balanced but quality-focused portfolio allocation with 60-65% in large caps, 20-25% in mid caps and 10-15% in small caps. According to the expert's analysis reported by ETMarkets, large caps currently offer a better risk-reward profile given their relatively reasonable valuations, stronger balance sheets and greater earnings visibility. Midcaps continue to offer attractive opportunities, but only in businesses with sustainable growth, healthy return ratios and clean balance sheets. Small-cap exposure should remain selective and limited to companies with strong cash flows and prudent capital allocation.
Khemka's preferred sectors include Manufacturing, Capital Goods, Defence, Healthcare, Automobiles and the broader financialisation theme as reported by ETMarkets. Within financials, the preference is for exchanges, asset managers, wealth managers and select NBFCs over banks, as banking margins are likely to remain under pressure in the near term. Healthcare offers an attractive combination of resilient earnings, improving export opportunities and reasonable valuations. The expert remains relatively cautious on Consumer Staples due to muted demand, Oil Marketing Companies owing to crude-related earnings uncertainty, and selective areas within IT Services where demand recovery continues to remain gradual.
According to Khemka's analysis reported by ETMarkets, Manufacturing remains the highest-conviction structural theme for wealth creation over the next five years, closely followed by financialisation. Manufacturing is benefiting from multiple long-term drivers including the China+1 opportunity, government infrastructure spending, PLI incentives, rising private capex and increasing domestic manufacturing capabilities. This creates opportunities across capital goods, industrials, EMS and defence sectors. Financialisation offers a long runway as household savings continue shifting towards financial assets, benefiting exchanges, asset managers, insurance and wealth management businesses.
The biggest risk identified by Khemka is a prolonged period of elevated crude oil prices driven by geopolitical disruptions, as reported by ETMarkets. India remains one of the world's largest crude importers, and sustained high oil prices would widen the current account deficit, keep inflation elevated, delay monetary easing and put pressure on corporate margins. However, India's domestic macro fundamentals remain relatively resilient, providing a supportive backdrop for long-term investors. The expert emphasizes that while higher crude may cap broad market returns, it is unlikely to derail India's long-term structural growth story, and quality stock selection should continue to outperform.
