Daily Voice: Right Horizons' Anil Rego explains why he prefers staples over non-staples currently, constructive on auto and component plays

The festive rally has propelled markets to fresh highs with Nifty crossing 26,000 level supported by robust DII flows of Rs 25,449 crore and improved earnings from banking heavyweights, but near-term consolidation is likely as valuations remain elevated.

While improving macro indicators and GST 2.0 reforms provide tailwinds, range-bound movement is expected through early 2026 with a meaningful rally anticipated only from H2 FY27 onwards as earnings trajectory strengthens.

We recommend selective stock-picking in quality large and mid-caps where earnings visibility justifies current multiples, while booking profits in businesses with sub-optimal growth or excessive re-ratings.

Has the rupee already peaked? Do you see potential for it to appreciate from current levels?

The rupee touched a record low of 88.47 per dollar in September 2025 driven by US tariffs and sustained FII outflows, but rebounded over 1 percent in mid-October due to RBI intervention, suggesting 88-89 levels as the near-term range. The forecast is that the rupee may weaken further to 89-90 per dollar by December 2025 as the RBI adopts a wait-and-watch approach allowing gradual depreciation to support export competitiveness amid US tariff pressures.

Meaningful appreciation is unlikely in the near term given structural headwinds from trade imbalances and dollar strength, though tactical stabilization around current levels is expected.

Do you believe the IT sector presents a good buying opportunity now, given that Q2 FY25 results did not deliver any major negative surprises?

Q2 FY25 results showed mixed signals with TCS missing profit expectations despite 7 percent revenue growth, while Infosys, Wipro and HCL Technologies posted stronger performances with revenue growth returning after a six-quarter gap, driven by discretionary spending revival in BFSI. However, muted FY26 growth projections, margin pressures from H-1B visa fee increases, and cautious client spending on discretionary projects suggest a broad-based sector rally remains unlikely in the immediate term.

We prefer selective exposure to quality IT names with strong deal pipelines and exposure to AI, cloud, and cybersecurity themes, but view the sector cautiously given persistent macro headwinds and valuation concerns.

Do you expect the strong demand in passenger vehicles (PV) and two-wheelers (2W) to sustain through next year as well?

The GST 2.0 reforms reducing taxes to 18 percent for small cars and two-wheelers under 350cc have triggered record festive sales with the industry witnessing 34 percent YoY growth during Navratri, while ICRA projects PV growth of 1-4 percent and two-wheeler growth of 6-9 percent in FY26.

Strong momentum is expected through Q3 FY26 supported by improved affordability, rural demand recovery on the back of above-normal monsoons and higher MSPs, alongside sustained replacement demand.

We remain constructive on auto and component plays benefiting from the GST tailwinds, rural consumption recovery, and localization opportunities under PLI schemes, particularly in EV components and export-oriented segments.

Do you foresee potential inflation concerns emerging in the Western economies?

The US is projected to see inflation at 3.2 percent in 2025 and 2.8 percent in 2026 with upside risks from tariff-induced supply shocks pushing inflation back above 3 percent by late 2025, while the euro area is expected to experience continued disinflation at 2.1 percent in 2025.

While global inflation is expected to decline to 4.2 percent in 2025, the US faces above-target inflation with risks tilted to the upside due to tariff pass-through effects and potential pricing pressures, creating divergence between US experiencing inflation reacceleration and other economies seeing ongoing disinflation. Western economies, particularly the US, face persistent inflation concerns that could delay monetary easing and impact emerging market flows.

Within the consumption space, do you currently prefer staples or non-staples?

GST 2.0 reforms have boosted consumption spending power by 0.7-0.8 percent of GDP, with retail sales growing 6.8 percent through July and FMCG volumes surging 13.9 percent in Q2FY25, while rural consumption hit a five-quarter high of 3.5 percent agricultural growth aided by strong monsoons.

CLSA's 2025 strategy emphasizes affordable consumption in staples driven by increasing rural incomes from government welfare spending, making staples and commodities their largest overweight sectors, while discretionary stocks remain underweighted amid elevated bond yields.

We prefer staples over non-staples currently, favouring companies benefiting from rural recovery, GST reforms, and mass-market consumption themes, while remaining selective in discretionary segments where valuations remain stretched relative to near-term growth visibility.

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