ETMarkets Smart Talk | Financialisation of savings could be India's biggest wealth creator over the next decade: Prashasta Seth

As global uncertainties, elevated crude oil prices and rich valuations keep Indian equities on edge, long-term structural themes continue to shape the country's investment landscape.

Among them, the financialisation of household savings stands out as one of the most powerful drivers of wealth creation over the next decade, according to Prashasta Seth, CEO, Prudent Investment Managers LLP.

In an interaction with Kshitij Anand of ETMarkets for Smart Talk series, Seth explains why the steady shift from physical assets to financial investments is transforming India's capital markets, shares his outlook on equities amid geopolitical and macroeconomic risks, outlines his preferred portfolio allocation, and highlights the sectors and themes he believes are best positioned to generate long-term returns. Edited Excerpts –


Q) Indian markets have started the second half of 2026 on a sombre note, falling over 1% so far in July. What is weighing on markets?
A) The markets are currently responding to three major uncertainties:

Firstly, geopolitical instability in West Asia which has lead to excessive volatility in crude /bbl, creating concerns regarding inflation, India's Current Account Deficit (CAD), and corporate profitability. Secondly, investors are cautious before the earning season for Q1FY27 as the valuations moved up following a strong rally over the last four months. Finally, what has also been playing on the markets is El Nino and its impact on the Monsoons

Q) Are current market valuations justified by earnings growth? How are you reading into June quarter numbers which have come so far?
A) The Nifty 50 currently trades at 19.3x one-year forward earnings, down from 24x in September 2024. This is not cheap in absolute terms, but represents a meaningful reversion to mean following an extended period of premium valuations.

As far as the Q1 numbers are concerned, they seem to be encouraging so far and if this momentum continues, we believe that we are likely to see an earnings growth in mid-teens for the current financial year. The growth, however will be variable across the various sectors.

Also Read: ETMarkets NRI Talk | Allocate 25-35% of your global portfolio to India for long term wealth creation: Pradeep Gupta

So far, earnings reports indicate that financial services results have been mixed with some of the larger private sector banks having reported a pressure on margins, microfinance seems to be recovering from its cyclical lows and Capital goods and engineering and manufacturing continue to secure large order books and doing so on the back of government/private sector expenditure.

On the other hand, export-oriented businesses, primarily IT services, continue to face challenges due to slow discretionary tech spending on the global market. Companies in the consumer segment have also indicated that demand is mixed.

Q) If you were building a fresh portfolio today, how would you allocate between large caps, midcaps and small caps?
A) If I were to build a new portfolio today, I would pursue an equal mix of 50% in large caps and 50% in small caps.

Large caps, with proven business models and corporate governance should from the core of the portfolio in any uncertain times when macros are the major variables. Many of these companies are good compounders have comparatively solid financial an provide the much-needed stability in these uncertain times.

Not to mention, that the large caps overall, have seen significant underperformance over the last 22 months both in terms of time and absolute correction.

The remaining portfolio, in my opinion should be predominantly small cap which normally are the engines of the portfolio returns. While we typically use a mix of both top-down and bottom-up approach to generate alpha – we have noticed that as of today, the smaller market cap segment provides a better value over their midcap counterparts and therefore portfolios should be tilted more towards small caps.

Q) Which sectors are you overweight, underweight and why?
A) We are currently overweight on the banking and financial services sector, with a particular preference for microfinance institutions. The sector has experienced a cyclical slowdown over the past few quarters, and seem to be on the path of recovery and growth over the next few quarters.

Asset quality trends are improving; credit costs are expected to normalize and loan growth remains healthy. Provided there are no fresh geopolitical disruptions or another sharp spike in crude oil prices, we expect earnings momentum to improve over the coming quarters.

Conversely, we continue to remain underweight on the IT sector and currently have near-zero exposure. While the long-term structural opportunity for Indian IT remains intact, the near-term outlook continues to be challenging because of cautious global enterprise spending and slower discretionary technology budgets. We believe there are better opportunities elsewhere in the market where earnings visibility is stronger.

More broadly, our portfolio is positioned towards sectors that are likely to benefit from lower crude oil prices if geopolitical tensions in West Asia ease. Softer crude prices support India's macroeconomic stability by reducing inflationary pressures, improving the CAD and lowering input costs across several industries. Businesses linked to domestic consumption, financials and manufacturing are among the key beneficiaries in such an environment.

Also Read: ETMarkets Smart Talk | Manufacturing and financialisation could create the most wealth over the next five years: Siddhartha Khemka

Q) Which structural theme has the potential to create the most wealth over the next five years—manufacturing, AI infrastructure, defence, financialisation, energy transition or consumption?
A) The financialisation of family savings seems to be India’s one of the strongest long-term structural themes. Indian families have begun transferring their savings from traditional assets such as gold and property to financial assets like mutual funds, stocks, ETFs and retirement products. SIP contributions continue to be strong, and the number of Demat accounts has reached 200 million, indicating the rise of retail participation in capital markets.

Manufacturing's share of India's GDP still has significant room to increase, making it one of the country's most compelling long-term opportunities and can be another structural theme going ahead. The government measures like the PLI scheme, increased private spending, and the global “China Plus One” strategy open many opportunities for Indian manufacturers, entrepreneurs, and capital goods companies.

Défense too, given the government focus of exports and pre-empting the imports for becoming “Atma Nirbhar” can be another decadal story. However, while investing in such sectors, one needs to be cognizant of the extremely high valuations and thus even though we like these sectors we haven’t been able to take exposure in them

Q) What's the single biggest risk to Indian equities over the next 12 months?
A) The single biggest risk for Indian equities is a prolonged period of high crude oil prices. If the Brent crude stays at an elevated level, it will have inflationary impact and will widen India's current account and fiscal deficit. In addition, this may lead to interest rate hikes and reduce consumer spending.

Q) What's the biggest mistake retail investors are making in the current market?
A) The biggest mistake for anyone would be just playing the momentum without giving proper thought to valuations and business fundamentals.

Another mistake is disregarding asset allocation and diversification. Successful investing is not about finding next multibagger every year, but building resilient portfolio able to compound wealth over the long period of time.

Investors need to invest in companies that can create sustainable earnings, reasonable return on capital and effective capital allocation decisions. Long-term wealth is achieved through disciplined investment techniques rather than trading too often or reacting to short-term fluctuations.

Q) Brent crude is again hovering around the US$100/bbl mark. Do you think higher crude oil will cap upside for the Indian market in the second half of 2026 as well?
A) The higher prices for crude oil present challenges to India's economy, as we rely heavily on energy imports. An elevated crude oil price could foreseeably lead to increased imported inflation and widening of CAD as well as lower profit growth for crude depend sectors such as aviation, logistics, OMCs.

The crude corrected back to around $90/bbl over the weekend, which has immediately led to relief rally highlighting its importance in the Indian markets. So, for India, the implications are unambiguously favourable if the crude corrects. Each $10/bbl decline in Brent reduces India's annual oil import bill by an estimated $12-15 billion.

The pressure on current-account and hence the INR eases giving the RBI greater policy flexibility. Lower crude also provides room for softer bond yields, a more stable rupee and greater monetary policy flexibility, INR stabilises and thereby brining back additional flows in the markets specially from the FIIs.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)