In no rush to invest heavily in IT stocks; valuations alone not enough, need growth prospects: Vallum's Manish Bhandari

When other industries struggle, pharma will naturally attract capital, said Manish Bhandari of Vallum Capital

With global changes, such as White House's new tariff regime and the growing influence of artificial intelligence, unfolding, does India stand to lose or gain and to what extent?

In an interview with Moneycontrol, Director and Principal Officer of Vallum Capital Advisors, Manish Bhandari explains how India could benefit from the global supply chain shifts and from capital flows driven by a weaker dollar. In this uncertain environment, Bhandari also shares where he sees growth opportunities.

Let’s start with the big picture. Everyone expects global growth to slow this year. Some reports suggest India’s GDP growth for FY26 could take a 50-bps hit. How do you see things playing out?
After decades of optimizing globalization, we’re now shifting toward localized economies. This is driving new supply chains and trade realignments. It’s too early to gauge GDP impact, but India is relatively insulated. We’re a service-led economy, with a nearly 5% share in global services—an area mostly untouched by tariffs. While some industries may face challenges, the overall downside risk isn’t as severe as feared.

The White House released new tariff numbers. Does this make India more competitive against China, Bangladesh, and Vietnam?
Yes. Tariffs on other nations open opportunities for India in areas where we were already gaining ground. If they persist, India could benefit from global supply chain shifts, especially versus China and Vietnam. Look at Vietnam—its tariff rates jumped from 0% to 46%, while India’s increased to 26%. That’s a competitive edge for us.
China had strategically invested in Vietnam and Bangladesh to strengthen supply chains, but this realignment favors India, especially in textiles and electronics. While some Indian sectors may see minor setbacks, on a relative basis, we’re far better positioned.
The market may see short-term adjustments, but the longer-term impact depends on how long these tariffs last. At this stage, India looks like a net winner.

How do Trump’s trade moves impact capital flows? The U.S. wants a reduced trade deficit and stronger domestic manufacturing—meaning a weaker dollar. Near-term and medium-term implications?
Trump’s “Make America Great Again” strategy isn’t a strong-dollar story. Look at his first term—after an initial spike, the dollar weakened significantly. We’re seeing the same playbook again. The DXY index jumped to 108 but has already given back gains.
The U.S. wants a weaker dollar to boost exports and ease fiscal burdens. Tariffs create uncertainty, which helps realign currencies. The key goal is to lower 10-year Treasury yields, reduce interest costs, and weaken the dollar—but executing this is tricky.
China adjusting its reference rate from 7.2 to 7.1 signals ongoing currency shifts. This mirrors the 1980s Plaza Accord, when Japan saw a sharp yen appreciation.
A weaker dollar benefits emerging markets, and India is well-positioned. China’s undervalued stock market may attract inflows too, but India stands to gain significantly as well. Recent FII flows turning positive suggest growing confidence in this trend.

Have we been too focused on developed vs. emerging markets? Given Europe's recent performance, is there a case for dollar flows shifting to other developed markets instead of emerging ones?
The key factor is market size. The "Magnificent Seven" in the U.S. have no real global counterparts that can absorb such massive capital. So, capital dispersion is happening in multiple directions, as reflected in gold’s rally over the past six to nine months.
Expecting an immediate flood of capital into emerging markets is tricky, as many were major exporters to the U.S., and their fundamentals are still adjusting. Investors need time to determine winners and losers.
If dollar debasement is underway, the sheer scale of U.S. capital outflows will lead to dispersion across various markets, depending on competitive intensity. It’s difficult to pinpoint a single destination, but capital will spread out, dictated by relative market sizes.

When will FII selling in India stop? Could it be soon?
Over the last 18 months, Fed tightening led to U.S. market crowding, pulling FIIs away from India. Now, the trend is reversing.
If dollar debasement plays out—historically a 7–8-year cycle—capital outflows from the U.S. could accelerate, benefiting India. This cycle was initially set to start in 2020 but got disrupted by COVID, which strengthened the dollar due to global chaos. Now, with the dollar weakening and the DXY Index potentially dropping below 90, capital dispersion is imminent.
India's overvalued markets corrected by 20%, forming a solid bottom—historically a typical correction without financial crises (unlike 2008, 2020). While the market isn’t set for a sudden surge, a base is forming for the next cycle.
FII selling has largely ended. With a weakening dollar, historical data doesn’t show FIIs selling in such conditions. The U.S. IT index has fallen 17–18% post-VPC release, while Indian and Chinese IT stocks have risen—indicating capital shifting away from U.S. exceptionalism.
European financials, long under pressure, are now booming due to fiscal stimulus. Other emerging markets will benefit too, though pinpointing the biggest recipient is tough. Bottom line: except for the U.S., capital will flow everywhere.

What's your take on small and mid-caps? Some fund managers still see overvaluation and expect corrections over the next couple of years. Do you agree?
If you look at corporate earnings, mid-caps have outperformed large-caps and even small-caps in recent cycles, excluding commodities. This segment will keep attracting capital and will naturally go through cycles of overvaluation and undervaluation.
I'm not pessimistic about mid-caps. What you invest in now, you’ll harvest in 2027—not next quarter. The Indian mid-cap story is stronger than the large-cap story.

What’s your outlook on pharma? It’s had a strong run and is exempt from tariffs. Could it be the next FMCG in terms of valuation reset?
Pharma is a globally competitive industry for India, which is why it's exempt from US tariffs—the world needs Indian pharma. The sector has legs for further growth, especially with the rise of CDMO (Contract Development and Manufacturing). With global supply chains diversifying away from China and India’s strengths in chemistry, IT, and manufacturing converging, pharma is uniquely positioned.
However, it’s a broad sector—API, formulations, CDMO, domestic pharma, contract manufacturing—and you can’t view it through a single lens. Valuations must be seen in the context of market dynamics. When other industries struggle, pharma will naturally attract capital. It’s not about absolute valuations but relative market positioning.

What’s your take on EMS stocks? Some see long-term growth, but valuations are stretched.
Electronics manufacturing is a powerful new theme, fueled by PLI incentives and India’s growing manufacturing base. India is now exporting significantly to the US, competing with Vietnam and China, thanks to favorable duty structures.
I’m not advocating for EMS stocks specifically, but this supply chain shift has given India an edge. The business models of these companies are evolving—some are moving from chipsets to semiconductors. High-growth industries command premium valuations, but whether a 50x or 70x P/E is justified will unfold over time.

What about IT? Will the sector remain weak given potential US growth concerns and lower discretionary spending?
Beyond the usual IT industry strengths, two negatives stand out. First, the rise of GCCs (Global Capability Centers) is challenging IT companies on high-end work. Second, the release of DeepSeek in China has put pressure on AI-related investments. If AI services can be done at a fraction of the cost, large US companies may cut IT spending, impacting India’s outsourcing revenues.
Additionally, India has no significant IT presence in China, making it difficult to find new growth markets. That’s why IT stocks—large, mid, or small—have struggled, even without tariff pressures. I’m in no rush to invest heavily in IT right now. Valuations alone aren’t enough; I want assets with solid growth prospects.

What are your top investment bets?
Rather than specific names, we focus on themes. About 30% of our portfolio is in domestic brands—underappreciated assets where entrepreneurs have built significant value. Building a brand, whether in services or products, is incredibly hard, yet the stock market hasn't fully recognised their worth.
We also hold significant exposure to healthcare, particularly CDMO, where India’s chemistry, manufacturing, and technology expertise intersect. Given shifting global trade dynamics, we’ll reassess opportunities as the tariff landscape evolves. It’s a fast-moving world, and portfolio positioning must adapt accordingly.