Expert view: Electronics, digital, capital goods, defence, NBFCs may outperform, says Motilal Oswal fund manager

Expert view: Varun Sharma, a fund manager at Motilal Oswal Mutual Fund, sees long-term growth potential in healthcare, digital ecosystem, electronics manufacturing, capital goods and defence. In an interview with Mint, Sharma shared his views on the Indian stock market and economy, as well as Q4 results for 2025 trends.

Edited excerpts:

The Indian stock market is exhibiting remarkable resilience. What is boosting market sentiment?

The Indian growth story is intact. There are many avenues for investing across sectors where we see longer-term growth potential, such as healthcare, digital ecosystem, electronics manufacturing, capital goods, and defence.

India is also largely domestically driven compared to other economies, which heavily depend on external trade. As average incomes rise, several discretionary-driven sectors will have significant market growth opportunities.

The RBI has proactively addressed liquidity issues across cycles, and the government has managed to meet energy demands, capex investments, inflation reduction and job demand despite several external and internal stresses.

This fiscal prudence, management, and growth initiatives have been unprecedented in Indian history and have helped domestic and foreign investors maintain their trust in Indian markets.

What are the key risks that investors should not overlook?

After a decade of reforms like the bankruptcy code, GST, demonetization, e-way bills, RERA, UPI, and Make in India, the country is much better in shape than it was in the past.

Therefore, foreign organisations have seen massive interest in investing in capacity building in India.

We have mostly external risks to worry about, such as trade disruptions and geopolitical tensions. Such incidents can impact valuations in the short term.

There are plenty of variables for the markets at this juncture. What should be our investment strategy?

Our investment strategy is consistent across market cycles, and we continue to focus on companies that have high growth and good business quality. 

Over the long term, stock returns are determined by business compounding, as valuations may remain cyclical. 

Investors always focus on high business compounding with reasonable stock valuations. 

We try to avoid investing in low-growth companies unless we see a turnaround towards high growth in future.

Which sectors have the potential to outperform in the next one to two years?

Spaces with intact long-term growth potential but a recent price correction are likely to see a positive rebound over the next couple of years. 

This includes electronics manufacturing, digital, capital goods, defence, and NBFCS. There are also pockets of growth in auto and consumer discretionary.

What is the impact of US tariffs on the Indian IT sector? Since you handle the digital fund, what are the opportunities in the digital space for investors?

US tariffs will likely result in a second-order impact on the IT sector due to the disruption in clients’ financials and budgeting. 

We don’t like the IT industry from a growth standpoint, as it will likely remain a mid-single-digit growth industry over the long term with depleting growth rates. 

Consequently, the business scale has become a growth challenge for large-scale IT services companies in India. Due to a robust bottom-up growth strategy, we prefer investing in mid- and small-sized IT companies that can grow materially faster than the industry. 

In the digital space, most companies are India-centric and have no noticeable business impact due to US tariffs. 

A few digital companies have international business, which may impact them. However, their international business exposure is limited compared to IT services companies, which practically do all their business internationally. 

Further, the digital space is growing rapidly globally, which allows digital companies with international exposure to find avenues for healthy growth despite external disturbances.

What are your expectations from Q4 earnings? Is the worst behind?

FY25 was an extraordinary year, with multiple events like the India and US elections, domestic liquidity squeeze, government spending redistribution, and normalisation of earnings growth towards the expected medium-term trend. 

When we exclude energy and metals, which tend to be cyclical, earnings growth has been healthy but still not double digits. Core earnings growth is likely to pick up from here, and we are likely to end FY26 with a good base for FY27.

What is your outlook for the Indian economy? Do you expect a favourable growth-inflation dynamic?

We remain positive about the Indian economy, given that the benefits of reforms over the past decade will be realised over time. 

The current government has shown an aptitude for managing external relations and ensuring that our energy demands are met despite global disruptions. 

Further, the “China plus one” theme and tariffs are relatively favourable to us, leading to expedited foreign investment in the country. 

The government has also managed growth and inflation exceptionally well over the past decade, as India has not seen such a period of continued growth and inflation management since its independence. 

Given the recent inflation print, we have room to boost growth again. According to us, 4-6 per cent inflation is healthy for the economy, boosting growth, employment, and exports.

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Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions, as market conditions can change rapidly, and circumstances may vary.