Daily Voice: Budget 2026 to prioritise strengthening domestic manufacturing, boost export competitiveness, says Quest’s Rakesh Vyas

Rakesh Vyas is the CIO and Portfolio Manager at Quest Investment Managers

• Earnings in small cap segment now appear to have bottomed out, setting the stage for a recovery, said Quest’s Rakesh Vyas.

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In the Union Budget 2026 likely scheduled on February 1, "priority is expected to be given for strengthening domestic manufacturing, boosting export competitiveness, and supporting strategic sectors aligned with the government’s long-term growth and self-reliance objectives," Rakesh Vyas, the CIO and Portfolio Manager at Quest Investment Managers said in an interview to Moneycontrol.

According to him, as growth visibility improves, small-and mid-cap companies are likely to deliver stronger earnings momentum compared to large caps.

He believes agrochemical sector valuations appear attractive relative to historical averages, and the improving earnings outlook is likely to translate into better stock performance over the next 4–8 quarters.

Do you foresee a strong turnaround in the power sector in 2026?

Power demand in CY25 was adversely affected by weather-related disruptions. However, with a normalization of weather patterns and a rebound in industrial activity, demand is expected to recover meaningfully.

Strong consumption trends across multiple sectors—supported by both fiscal stimulus and accommodative monetary policies—should drive higher power offtake. This improvement in demand dynamics is likely to translate into better earnings visibility for power companies, which in turn could lead to improved stock performance, driven by both earnings growth and valuation re-rating across the sector.

Are agrochemical stocks currently available at attractive valuations compared to their historical averages?

Agrochemical demand has remained volatile over the past two years, leading to a prolonged phase of global de-stocking and, consequently, weak revenue traction for most Indian agrochemical companies. This slowdown has been largely reflected in current stock valuations. However, the de-stocking cycle now appears to be nearing completion, with demand expected to gradually normalize and drive volume-led growth.

As volumes recover, operating leverage should support margin expansion, resulting in a meaningful improvement in earnings. Given this backdrop, sector valuations appear attractive relative to historical averages, and the improving earnings outlook is likely to translate into better stock performance over the next 4–8 quarters.

Do you expect small- and mid-cap stocks to outperform large caps in 2026?

Small cap stocks have underperformed over the past four to five quarters, driven by earnings disappointments and a consequent correction in valuations. However, earnings in this segment now appear to have bottomed out, setting the stage for a recovery.

As growth visibility improves, small- and mid-cap companies are likely to deliver stronger earnings momentum compared to large caps. While large-cap earnings growth is expected to remain steady at around 12–13%, the sharper earnings recovery in the mid- and small-cap space should translate into relative outperformance and superior returns in 2026.

What are your key expectations from the upcoming Union Budget, and which sectors are likely to be on the government’s priority list?

The government has already implemented several policy measures and interventions to support consumption and economic growth in 2025. However, with limited fiscal headroom expected in 2026, the scope for significant increases in government capital expenditure or broad-based tax cuts appears constrained.

Instead, the Budget is likely to emphasize targeted, sector-specific incentives aimed at crowding in private capital expenditure. Priority is expected to be given to initiatives that strengthen domestic manufacturing, enhance export competitiveness, and support strategic sectors aligned with the government’s long-term growth and self-reliance objectives.

Do you believe 2026 will mark a strong comeback year for corporate earnings?

Corporate earnings are expected to normalize after the past four to five quarters of muted performance. The recovery in earnings growth is likely to be led by the lending sector, supported by healthier credit growth and improving net interest margins.

In addition, a pickup in consumer discretionary demand—across segments such as automobiles, real estate, and retail—should further support earnings momentum. Export-oriented sectors, including manufacturing, are also expected to benefit from improving global demand conditions. Overall, we expect broad-based corporate earnings growth to be in the range of 12–14% in 2026.

If so, could this support equity markets in delivering returns of around 15% in 2026?

Equity market returns are expected to broadly track the underlying earnings trajectory. Given current valuation multiples, the scope for meaningful re-rating appears limited, suggesting that returns are likely to be earnings-driven.

As a result, market performance in 2026 should improve compared to 2025 but is more likely to be in the range of 12–14%. That said, a sustained revival in foreign institutional investor (FII) inflows could provide incremental upside and potentially push market returns closer to, or even above, the 15% mark; however, visibility on the timing and magnitude of such flows remains uncertain.

Given that most risks appear to be priced into the IT sector, do you expect it to surprise positively on the earnings front this year?

Large IT services companies are likely to continue reporting single-digit revenue growth, reflecting a still-cautious global technology spending environment. However, a depreciation of the INR against the USD could provide some support to margins.

Select mid- and small-sized IT services companies may witness relatively better earnings traction, driven by niche capabilities and improved deal execution. That said, earnings growth for large IT players is expected to lag broader market earnings growth, limiting the scope for a meaningful positive surprise at the sector level.