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

As Indian equities navigate a volatile second half of 2026 amid elevated crude oil prices, mixed corporate earnings and global macro uncertainties, investors are increasingly looking beyond near-term market swings to identify long-term wealth creation opportunities.

In an interaction with Kshitij Anand of ETMarkets, Siddhartha Khemka, Head of Research, Wealth Management at Motilal Oswal Financial Services, says manufacturing and financialisation remain the two strongest structural themes for investors over the next five years.

He also shares his preferred portfolio allocation, sectors to overweight, key risks facing Indian equities, and why quality stock selection and valuation discipline will be critical in the current market environment. Edited Excerpts –


Q) Indian market started 2H2026 on a sombre note, falling over 1% so far in July. What is weighing on markets?
A) The recent weakness reflects a combination of global and domestic factors rather than any change in India's structural growth story.

The sharp rise in crude oil following renewed geopolitical tensions in the Middle East has revived concerns around inflation, the current account deficit and corporate margins.

At the same time, elevated US bond yields and a stronger dollar have kept FII flows volatile, while investors have become more selective after the strong rally over the past few quarters.

The June quarter earnings season has also begun on a mixed note, with strength in manufacturing-led sectors offset by pressure in IT and OMCs. Overall, we expect markets to remain earnings-driven, with stock selection becoming far more important than sector or index allocation.

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Q) Are current market valuations justified by earnings growth? How are you reading into June quarter numbers which have come so far?
A) Large-cap valuations remain broadly reasonable, supported by expectations of low-to-mid teen earnings growth over FY27. However, the margin of safety reduces as we move into the broader market, where several mid- and small-cap stocks continue to trade at elevated valuations despite moderating earnings expectations.

The June quarter has largely been in line with expectations. Manufacturing-led sectors such as Automobiles, Capital Goods, Defence and EMS continue to deliver healthy growth, while Financials remain resilient despite some margin pressure.

IT Services and OMCs remain relatively weaker pockets. Overall, earnings continue to support quality businesses, but valuation discipline and stock selection will be the key differentiators going forward.

Q) If you were building a fresh portfolio today, how would you allocate between large caps, midcaps and small caps?
A) I would maintain a balanced but quality-focused allocation with around 60-65% in large caps, 20-25% in mid caps and 10-15% in small caps.

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. Rather than increasing exposure across broader indices, investors should focus on quality businesses where earnings growth can sustain valuations over the long term.

Q) Which sectors are you overweight, underweight and why?
A) Our preferred sectors remain Manufacturing, Capital Goods, Defence, Healthcare, Automobiles and the broader financialisation theme.

We continue to favour businesses with strong earnings visibility, healthy balance sheets and structural growth drivers.

Within financials, we prefer exchanges, asset managers, wealth managers and select NBFCs over banks, as banking margins are likely to remain under pressure in the near term. Healthcare also offers an attractive combination of resilient earnings, improving export opportunities and reasonable valuations.

We remain 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.

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) Manufacturing remains our highest-conviction structural theme, 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. Financialisation also offers a long runway as household savings continue shifting towards financial assets, benefiting exchanges, asset managers, insurance and wealth management businesses.

Defence and AI infrastructure remain attractive long-term opportunities, but the investment universe is relatively narrower and more stock-specific compared with manufacturing.

Q) What's the single biggest risk to Indian equities over the next 12 months?
A) The biggest risk would be a prolonged period of elevated crude oil prices driven by geopolitical disruptions. 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.

It could also dampen foreign investor sentiment and limit valuation expansion. Beyond crude, global trade uncertainties and a sharper-than-expected slowdown in developed markets remain important risks.

That said, India's domestic macro fundamentals remain relatively resilient, providing a supportive backdrop for long-term investors.

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Q) What's the biggest mistake retail investors are making in the current market?
A) The biggest mistake is chasing momentum without paying adequate attention to valuations and earnings quality. Many investors continue to gravitate towards thematic stories or smaller companies after the strong returns of recent years, often overlooking business quality, balance sheet strength and cash flow generation.

In the current environment, where valuations remain elevated in several pockets of the market, discipline becomes even more important. Investors should focus on businesses with sustainable earnings growth rather than recent price performance.

A diversified portfolio, systematic investing and staying invested in quality businesses through market cycles remain the most effective ways to create long-term wealth.

Q) Brent Crude is again hovering around the $100/bbl mark. Do you think higher crude oil will cap upside for Indian market in the 2H2026 as well?
A) Persistently elevated crude prices would certainly act as a near-term headwind for Indian equities. Higher oil impacts India through multiple channels—it raises inflation, widens the current account deficit, pressures corporate margins and limits the scope for valuation expansion.

Sectors such as OMCs, Aviation, Chemicals and Logistics would be the most directly affected. However, India is much better positioned today than during previous oil shocks, supported by healthy domestic demand, sustained government capex and strong domestic institutional flows.

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.

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