In a crucial assessment ahead of the Union Budget, the head of equity investments at Canara Robeco Asset Management Company has emphasized that continued government expenditure is vital for the economy. Shridatta Bhandwaldar, Chief Investment Officer-Equities, expressed hope that the government will refrain from aggressive fiscal tightening, given the current macroeconomic backdrop.
Budget Expectations: Limited Scope, Focus on Spending
According to Bhandwaldar, expectations from the upcoming budget are inherently limited. He noted that while the budget often excites market sentiment, it rarely delivers major structural changes, as significant taxation and strategic decisions are increasingly announced outside the budget framework.
The primary hope is that the government does not pursue aggressive fiscal consolidation. Bhandwaldar highlighted that with private capital expenditure remaining subdued, household income growth seeing limited traction, and overall demand conditions weak, government spending continues to play a crucial role in supporting the economy.
He pointed out that the previous budget marked a pivot towards boosting consumption and revenue expenditure. The upcoming budget, he argues, should avoid further tightening on this front. Additionally, he expects defence capital expenditure to rise in light of the prevailing geopolitical realities.
On the taxation front, Bhandwaldar believes sector-specific changes, such as those for life insurance, have largely been addressed. He stated that mutual fund taxation is unlikely to be altered, as past hikes—from 10% to 12.5%—ended up hurting investor sentiment without significantly boosting government revenues. "Any tinkering usually occurs in bullish markets," he added, suggesting divestment targets could be raised on paper to offset potentially lower tax collections.
Market Outlook for 2026: A More Constructive Backdrop
Discussing the market outlook for 2026, Bhandwaldar struck an optimistic yet measured tone. He acknowledged that the last 12-15 months saw India's valuation-earnings context look less attractive compared to other emerging markets like Brazil, Korea, and Taiwan. This divergence drove global capital elsewhere, contributing to foreign institutional investor (FII) outflows of approximately $17-18 billion, which were offset by robust domestic inflows of around $80 billion.
However, he outlined three key positive shifts. First, corporate earnings are bottoming out, with downgrades largely ceasing, and large-cap valuations have moved to fairer levels, rekindling FII interest. Second, India's premium valuation compared to emerging market peers has normalized to about 45-50% from a high of nearly 80%. Third, concerns over tariffs may ease, while government measures—including GST support, corporate tax cuts, and state-level welfare schemes—are expected to bolster consumption.
"Overall, for 2026, the valuation and earnings backdrop is far more constructive than it was 18 months ago," Bhandwaldar concluded, improving both top-down and bottom-up investment prospects.
Sector Preferences: Overweight on Consumption and Financials
Detailing Canara Robeco's investment strategy, Bhandwaldar identified consumer discretionary as their largest overweight sector. This encompasses automobiles, auto ancillaries, retail, quick-commerce platforms, hotels, aviation, jewellery, and select grocery retailers.
Pharmaceuticals, particularly domestic branded players, hospitals, and contract development and manufacturing organizations (CDMOs), form another key overweight. Within industrials, the fund is overweight on defence and transmission & distribution. In financials, banks and capital market players are favoured, with selective exposure to non-banking financial companies (NBFCs).
On the other hand, the fund maintains an underweight stance on staples, though exposure has been gradually increased over the past 6-8 months. Information technology is marginally underweight due to earnings visibility concerns and the ongoing impact of AI-led transitions. Oil and gas is underweight owing to regulatory uncertainties.
Bhandwaldar expects the strongest earnings growth to emanate from the consumer discretionary sector, followed by financials. Select industrials like defence, electronics manufacturing services (EMS), and transmission & distribution, along with pharmaceuticals and telecom, are also anticipated to post healthy earnings.
The CIO clarified that their approach is not about avoiding sectors but avoiding businesses with weak execution, poor governance, or bad capital allocation. He cited metals and global commodities as structural underweights, as many companies in these sectors often fail to meet their criteria on management quality, return metrics, and cash flow generation.
Market Cap View and Cash Levels
On the debate between large-caps and mid/small-caps, Bhandwaldar stated that since March 2024, large caps have offered a better risk-reward proposition, with valuations near historical averages. He emphasized that the market has become decidedly stock-specific, with performance hinging on being in the right sectors rather than the right market capitalization.
Regarding cash levels in portfolios, Canara Robeco typically maintains a cash position of 5-6%. Bhandwaldar advocated for staying invested, noting that attempts to time the market often backfire, and a long-term equity allocation has historically been more effective for wealth creation.
Finally, on foreign investor norms, Bhandwaldar suggested that some taxation changes could target foreign equity investors, who are treated differently from domestic investors. He mentioned that growth-friendly reforms not requiring expenditure, such as those facilitated through Gift City, could be supportive. He also noted that foreign investors have raised concerns seeking parity with domestic investors, making it a point of attention.
