Daily Voice: Sanjay Chawla favours consumer discretionary, healthcare; earnings growth to improve in Q3 FY26

Sanjay Chawla is the CIO - Equity at Baroda BNP Paribas Mutual Fund

According to Sanjay Chawla, the CIO - Equity at Baroda BNP Paribas Mutual Fund, consumer discretionary could be an interesting space for 2026. The tailwinds of GST rationalization, falling interest rates and a thrust towards local manufacturing should act as a fillip for the space, he said in an interview to Moneycontrol.

From a bottom up perspective, he is also confident on the healthcare sectors.

He believes earnings should, in all likelihood, improve further from the opening quarter of 2026 given the favourable base effects, interest cost savings and the demand arising from the strong underlying growth.

We would place 2025 as a year for realignment and consolidation. To recap, broader markets delivered single-digit returns with large caps outperforming the small and mid cap stocks space. We saw multiple worry lines for markets during the year which included US tariffs, the border conflict with Pakistan in end-April/ early-May 2025 and an anemic WPI raising questions on weak pricing power for manufacturers. These were largely countered by consumption boosters from the government in the form of tax cuts, GST rationalization and lower interest rates.

This consolidation has resulted in valuations coming to historic mean levels and a recovery in earnings momentum to the double-digit mark which are strong foundations as we enter 2026 to be able to deliver a likely low teens return.

When we break down 2025, FII selling was pronounced in the early part (Q1CY25) and then tempering over the course of the year. Correction in valuations has largely minimized the selling pressure though the large activity in primary market is likely leading to some rotation from secondary to primary markets.

Given our current valuations, pick up in earnings, an improving monetary environment and the growth rates we are clocking, it is likely that FII’s would start evincing stronger interest into our markets in 2026. Primary market activity could however determine whether money goes to primary or secondary markets.

In our view, consumer discretionary could be an interesting space for 2026. The tailwinds of GST rationalization, falling interest rates and a thrust towards local manufacturing should act as a fillip for the space. Within the space, consumer services which encompasses platforms, payment architectures etc is also a high growth area which we are positively inclined on.

From a bottom up perspective we are confident on the consumer discretionary and healthcare sectors. From a top down view, two themes – USD weakness and high global spending in AI/data centres could result in some tailwinds for commodities (metals) and IT services respectively.

As mentioned above, IT and healthcare appear promising at this juncture which are both export-oriented. Within consumption, we like the discretionary space among the consumption basket over staples and consumer electricals.

In our view, in the early part of 2026, RBI will wait for the lag effects of transmission of its end 2025 rate actions and also some clarity on the final tariff settlement on the Indo-US trade agreement.

As it is, given the current strong growth, there is no immediate pressure on RBI to stimulate. However, into 2026, assuming normal monsoons and benign primary articles inflation we would expect RBI to undertake further rate cuts.

In our view, this has been the most noticeable change for our markets. After nearly 4 quarters of weak earnings momentum, the September 2025 quarter results showed early signs of a recovery in earnings. This should, in all likelihood, improve further from the opening quarter of 2026 given the favourable base effects, interest cost savings and the demand arising from the strong underlying growth.

In our view, markets should be well poised for a low to mid teen growth into 2026.