ETMarkets Smart Talk: Fixed income attractive with rate cuts ahead; 20–40% allocation advisable for risk hedge, says Tanvi Kanchan

In an exclusive conversation with ETMarkets Smart Talk, Tanvi Kanchan, Head – Strategy & NRI Business at Anand Rathi Shares and Stock Brokers, highlighted the growing appeal of fixed income as an asset class amidst the current market volatility.

With rate cuts on the horizon and yields remaining attractive, she believes debt investments now offer both stability and potential returns.

Kanchan advises investors to allocate 20% to 40% of their portfolios to fixed income instruments as a prudent hedge against market uncertainty, especially given the recent equity market consolidation. Edited Excerpts –

Q) Thanks for taking the time out. Nifty closed with marginal gains in June, but for the first six months of 2025 – it is up over 7%. How do you see markets for the rest of FY26? Any big events to watch out for?

A) June was a month of remarkable resilience for Indian markets despite significant global uncertainties. The escalation of the Israel-Iran conflict mid-month, with US participation and crude oil spiking to nearly $80 per barrel, initially rattled markets. However, the subsequent ceasefire announcement triggered a sharp rally in global equities and a corresponding decline in crude prices.

Indian markets capitalized on this positive momentum, with the RBI's decisive 50 basis point rate cut and 100 basis point CRR reduction providing additional liquidity support. The Nifty delivered its fourth consecutive monthly gain, rising 2.9% in June, while broader markets outperformed with midcap and small cap indices up 3.7% and 5.1% respectively.

Looking ahead to the remainder of FY26, markets face a critical juncture. The most significant event to monitor is the resolution of Trump's tariff proposals, with the extended deadline now pushed to August 1st.

This clarity will be crucial for market direction. Domestically, we're entering the Q1 FY26 results season, which we expect to be mixed - export-focused companies will face tariff-related headwinds while domestic companies should see gradual recovery.

The encouraging early monsoon trends, combined with RBI's rate cuts and liquidity infusion, should support demand revival.

At current levels, we believe markets will remain highly stock-specific, with earnings surprises being rewarded. The continuous flow of IPOs and secondary offerings will absorb liquidity and limit broad-based rallies.

Given these dynamics, we anticipate markets entering a near-term consolidation phase, where fundamentals and company-specific performance will drive returns rather than broad market momentum.

Q) How are you managing the volatility in your portfolio? Any key learnings which you would like to share from 1H2025?
A) From a portfolio construction standpoint, we've become more selective in our asset allocations, focusing on strategies driven by strong domestic demand drivers to hedge against global uncertainties.

The experience has taught us that in volatile environments, quality and patience are your best allies. Companies with strong balance sheets, consistent cash flows, and pricing power have not only weathered the storms better but have also positioned themselves to capitalize on the recovery phases.

Moving forward, we're maintaining this disciplined approach while keeping adequate liquidity to take advantage of future market dislocations.

Q) One of the reports suggested that India Inc.’s profits have grown nearly 3x faster than GDP since FY20. What structural factors are driving this divergence?
A) This remarkable divergence reflects a fundamental shift in India's economic structure and corporate efficiency. The primary driver has been the massive private sector capital expenditure surge we've witnessed, with private investment jumping from ₹7.42 lakh crore in FY21 to ₹32.28 lakh crore in FY23.

This capex boom, focused on manufacturing, electronics, chemicals, and green energy, has dramatically improved operational leverage and productivity across Indian corporates. Companies that invested heavily in automation, digitization, and capacity expansion during the pandemic are now reaping the benefits of enhanced efficiency and scale.

The second critical factor is the structural shift in India's savings pattern and capital allocation. We've seen household savings move decisively from bank deposits - which declined from 57% to 37.2% over the decade - into equity markets through mutual funds, which grew from 0.8% to 6.1% of household savings.

This has created a virtuous cycle where cheaper equity capital has enabled companies to invest more aggressively in growth initiatives while reducing their cost of capital. The mutual fund AUM reaching ₹72.2 lakh crore with 22-24% annual growth has provided a stable funding base for corporate expansion.

The third structural driver is the formalization and digitization of the economy, which has improved corporate margins and return on assets.

Government initiatives like PLI schemes, GATI Shakti, and tax rationalization have enhanced the ease of doing business, while the demographic dividend - with 65% of the population in the working age bracket - has kept labor costs competitive even as productivity has surged.

Additionally, the shift from government-led to private sector-led capex has ensured that investments are flowing to the most efficient and profitable opportunities rather than policy-driven projects.

This combination of operational leverage, cheaper capital, structural reforms, and demographic advantages has created an environment where corporate profits can grow sustainably faster than GDP.

Q) With the China+1 theme gaining traction, which Indian sectors are best placed to attract global capital and scale?
A) Three sectors stand out as clear winners in the China+1 opportunity are Electronics and semiconductor manufacturing which leads the pack, benefiting from PLI scheme incentives and India's young workforce advantage.

Followed by Pharmaceuticals and chemicals, which represent the second major opportunity, where India's established API capabilities and regulatory expertise provide natural advantages. This sector has already attracted significant global capital as part of the broader FDI surge we've witnessed - annual inflows doubled from $45-60 billion to over $80 billion recently.

The third sector is renewable energy and green technology, perfectly aligned with India's climate commitments and the current private sector capex boom. With private investment jumping to ₹32.28 lakh crore and government infrastructure spending rising to ₹11.1 trillion, these sectors have the policy support and foundational infrastructure needed for rapid scaling.

Q) How is fixed income as an asset class looking for long term investment. How much money one should allocate as an hedge to combat volatility?
A) Fixed income always provides cushion against volatile periods, allocation to debt as an asset class not only provide good hedge opportunity but now with rate cut- and higher yields, bonds may provide attractive return generation capabilities as well. One can look at allocating 20%-40% in debt depending on their risk portfolio and investment duration.

Q) Which sectors are likely to remain in the spotlight in 2H2025?
A) Corporate earnings are forecast to rise by 12–15%, particularly driven by sectors like banking, infrastructure, defense, and consumption.

Q) Can we say that we are in a "stock picker’s market" ahead. If yes, what are the key traits investors should look for in FY26 picks?
A) Unlike the last 3 years when the majority of the stocks outperformed, 2025 is likely to be a stock picker's year. This shift reflects a market environment where broad-based rallies are giving way to more selective performance, requiring investors to be more discerning in their stock selection.

Investors will have to carefully separate the wheat from the chaff & focus on stocks with earnings visibility & sound fundamental background, companies with predictable earnings growth and strong balance sheets will likely outperform in a more selective market.

Looking at the rate cuts to be expected in the future, one can also look at companies who will benefit from lower cost of borrowings.

The key is to move away from broad market beta plays and focus on companies with specific competitive advantages, clear earnings catalysts, and exposure to India's structural growth themes. Quality over quantity will be the mantra for successful stock picking in FY26.

Q) Gold has also seen a tremendous run in 2025 – how do you see the yellow metal shining in 2H2025? Time to book profits or add on dips?
A) The extraordinary rally in gold this year comes amid growing geopolitical tensions, trade related uncertainties and pressure on both – Equity and Debt as an asset class in the near term.

But when you analyse data over a longer period of time, equity has consistently outperformed the precious yellow metal.

Q) How should one play the small & midcap theme? Has the profitability improved compared to largecaps – what does the data suggest?
A) Over the last few years, small and midcap segments have undergone a structural transformation in profitability, creating a compelling case for selective participation.

Historically, these segments were associated with high volatility and weaker earnings visibility compared to largecaps. However, recent data points to a significant improvement in earnings quality and growth trajectory.

From FY21 onwards, Nifty Midcap 150 and Smallcap 250 earnings have grown sharply, marking a structural shift. Midcaps saw earnings rise from ₹238 in FY21 to an estimated ₹627 in FY25—an increase of over 2.6x in four years.

Similarly, smallcap earnings surged from ₹170 in FY21 to ₹526 by FY25E, a 3x jump. This outpaces the earnings growth of Nifty 50, which is expected to grow from ₹436 in FY21 to ₹1,113 in FY25—an impressive but relatively modest 2.5x growth.

From a valuation perspective, the Nifty Midcap 150 PE at 34.9 is above its 10-year average of 30.2, suggesting midcaps are relatively expensive. On the other hand, Nifty Smallcap 250 PE stands at 33.5, well below its 10-year average of 39.3, implying smallcaps are trading at a discount to their historical multiples.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)