ETMarkets Smart Talk | Capex and consumption may steal the show in Budget 2026: UTI AMC’s Karthikraj Lakshmanan

In this edition of ETMarkets Smart Talk, Karthikraj Lakshmanan, Senior Vice President – Equity at UTI AMC, shares his perspective on the recent nervousness in domestic equities, Budget 2026 expectations, and key sectoral trends to watch.

He believes the upcoming Budget is likely to strike a balance between fiscal discipline and growth support, with capital expenditure and consumption emerging as the key themes.

Lakshmanan also discusses the outlook for earnings, the impact of rupee depreciation on the IT sector, and how investors should approach small and midcap stocks amid elevated valuations and global uncertainties. Edited Excerpts –

Q) It looks like there is some nervousness on D-Street – is it because of Budget or geopolitical concerns. How should investors decode?

A) Broader markets corrected ~5% in January 2026, with small and micro caps under pressure for months. The delayed US trade deal and the sharp rupee depreciation toward 92/USD have added to nervousness.

While a weaker rupee may help exporters, it pressures imports and consumption. Markets peaked in September 2024, and since then both time and price correction have eased valuations.

The slowdown in revenue and profit growth over the past year stemmed from tighter liquidity, negative fiscal impulse, and low nominal GDP growth due to muted inflation.

These headwinds are now reversing; interest rates are down 125 bps from peak, liquidity has improved, inflation should rise as base effects fade, and recent direct tax/GST cuts support consumption.

Valuations remain above long term averages but are more reasonable than a year ago—particularly for large caps. A staggered investment approach with a 5+ year horizon remains prudent.

Q) What are your expectations from Budget 2026 from a market and economic perspective?
A) We expect continued fiscal consolidation, with the government aiming to maintain deficit discipline while gradually improving the Debt/GDP trajectory to the targeted 50% levels in next few years.

While higher RBI dividend and divestment targets could provide room for spending, the lower tax growth may be a limiting factor. Given current conditions, the Budget may balance prudence with taxpayer incentives and sustained capital expenditure.

Measures over the past year—both within and outside the Budget—should aid growth momentum. India’s sovereign debt remains manageable compared to many developed economies, offering policymakers more flexibility without risking fiscal stability.

Q) There are 2 precious metals which have not lost their sheen even in 2026 – Gold & Silver. We have seen some volatility – how should one play this theme?
A) My focus is on domestic equities and don’t have a fundamental view on Gold & Silver. Precious metals have seen unprecedented rally in the last couple of years, especially in the last 6 months due to the global uncertainty and the dollar weakness.

After such a sharp rally, the risk of a correction always increases, especially in the short term. The best way for an investor is to have proper asset allocation and diversification to navigate the uncertain environment and markets.

Excessive allocation to one asset class may cause volatility and impact overall risk-return outcome. Hence a balanced asset portfolio based on each investor’s risk profile would be a better solution.

Q) Which sectors are likely to remain in the limelight in the Budget?
A) If capex growth is higher than the GDP growth expectations, capital goods and infrastructure could benefit. With direct tax and GST cuts already implemented this past year, there may be room for incremental tax incentives to support discretionary consumption.

Even without further cuts, past measures and favourable monsoons should aid consumption recovery. Overall, we expect a balanced Budget that maintains fiscal discipline, sustains high capex, and offers some relief to taxpayers.

Q) The December quarter earnings are underway – what is your take on the earnings which have so far?
A) The earnings season has just begun, but early trends mirror recent quarters: slower revenue and profit growth. Some discretionary categories like autos have benefitted from GST cuts, while extended monsoons have impacted other pockets of consumption. Information Technology (IT) services has been more in-line with muted growth expectations.

Banks credit growth is picking up, and asset quality has held up well though interest margins have been impacted resulting in lower profit growth. For broader markets, we expect growth to gradually pick up in FY27 as cyclical pressures ease.

Q) Hiring has taken a back seat in the Indian Technology sector. What is your take on the service space amid rupee depreciation, rise of AI and global slowdown?
A) The IT sector has faced three difficult years with weak client spending, leading to reduced hiring. AI adoption also means growth will not be fully proportional to headcount.

That said, Indian IT firms may benefit from AI implementation opportunities as clients accelerate digital and efficiency initiatives. Early signs suggest improving deal traction.

Rupee depreciation against USD and even sharper fall against Euro and British pound—adds a tailwind. Risks from a global slowdown persist, but valuations have corrected meaningfully after last year’s underperformance.

Q) How should one play the small & midcap theme?
A) While indices haven’t corrected much, individual stocks are well off their peaks, creating selective bottom-up opportunities—especially with earnings growth likely improving in FY27.

However, overall valuations in small and mid-caps remain above historical averages, and global risks persist. Investors may be better off focusing on high quality names where valuations are reasonable and adopt SIP or staggered deployment.

Return expectations should be tempered: FY21–25 saw unusually strong earnings due to Covid base effects, while profit margins are elevated currently. Since revenue growth is not materially faster for small/mid-caps versus large caps, bottom-up stock selection becomes crucial.

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