Lower initial public offering (IPO) valuations should lead to better listing outcomes, but they also pull down valuations of listed companies, Gupta highlighted.

However, he also believes that valuations aren't the main concern now, as broadly speaking, valuations matter less today than they did a year ago, although some pockets still have high expectations.

Edited excerpts:

What's the mood in the market right now?

About a year ago, expectations were high that the market would continue delivering very strong returns. We could sense this in the market, for example, in the heavy oversubscription in the retail category in IPOs. There was also a lot of chasing returns, and investors were moving down the market-cap curve. That has now moderated. People are investing more thoughtfully and with more circumspection. Flows are coming across the market-cap cohort, and interest in multi-asset products has grown as investors have seen the benefits of diversification across asset classes this year. Overall, investor inclination towards equity has sustained, and it continues to draw much more interest than debt. That said, many of the excesses we were seeing a year ago have now eased.

What's your take on valuations?

Valuations have also moderated. The large-cap index and broader market have not moved significantly, and the small-cap index is actually down over the last 12 months. Earnings growth has been positive, resulting in a 10% overall easing of PE multiples. We also have better visibility for next year, as this is the first quarter in 5-6 quarters without an earnings downgrade. So the valuation premium versus a year ago has clearly moderated. Even more so, relative to global markets that in 2025 have seen a strong equity rally, with many markets up 20–60%, India has largely stayed out of it. Valuations aren't the main concern now. Although some pockets still have high expectations, broadly speaking, valuations matter less today than they did a year ago.

With India's premium to global markets now moderated, where does that place the country in the broader investment landscape? And with the diversification trend and more Indians investing globally, do you see foreign flows returning to India?

Foreign inflows have been a disappointment so far. We've seen about $17.7 billion of FII (foreign institutional investor) outflows this calendar year. November brought some positive flows, but the last couple of weeks turned negative again, so that support hasn't held. The reasons go beyond valuations. The AI trade driving the global market rally hasn't worked in India's favour, and the trade deal expected in June has been delayed. These two factors hurt us in 2025, but both could reverse in 2026; an AI correction could help India, and a completed trade deal would be positive. Earnings growth that had slowed is also coming back. With growth improving, we should start seeing flows return.

You mentioned that markets hadn't moved much over the past year, but they're now edging toward new highs. Yet, the journey has been quite bumpy; we see a move up, followed by a pullback. What is dragging the market?

The biggest factor is sheer liquidity, especially with the heavy IPO pipeline. The first half of 2026 will see several big IPOs, so equity supply will continue to be overwhelming. There were over 90 IPOs in 2024, and by the end of this month, the count for 2025 is nearing 100, translating to about $20 billion of equity supply each year. The pipeline for 2026 remains large, with several large IPOs slated to hit the market in the first half.

Another $30-40 billion of supply has come in each of the last two years, from stake sales by promoters and private equity funds.In 2024–25, secondary stake sales were nearly 2x IPO fundraising. Over 60% of the funds raised in IPOs over the last couple of years have also been offer-for-sale, in many cases by private equity or venture capital investors who have sold part of their stake. Therefore, even if IPOs were to stop today, as pre-IPO stakes are unlocked, the equity supply would continue. Over the next six months, about $30 billion of pre-IPO stakes are expected to unlock, ensuring that the secondary stake supply remains high. As the supply remains large, it naturally caps market returns.

The positive is that earnings are recovering, and confidence in economic growth is improving. The trade deal hasn't been finalised, but this has spurred the government to be more proactive in areas such as labour codes and GST (Goods and Services Tax). Fundamentally, we are in a better position, and 2026 appears to be more promising than last year. But with such a heavy supply, you can't expect a runaway market.

So, what's the cautionary tale here? What risks does this oversupply pose? Could it even lead to a correction?

Thankfully, supply by itself cannot lead to a huge drawdown, because if the market falls, the supply stops then people simply don't invest. For instance, in March 2025, I don't think a single IPO came through because the market had fallen from October to February, and there was no appetite for new listings. As the market gets overwhelmed by supply, IPO multiples are also coming down. In many cases, IPOs that didn't receive adequate demand had their price expectations revised down by 20–30%.

If valuations are lower now, does that translate into more investor interest in IPO bets?

Overall, FII activity from January 2025 is negative $17.7 billion. However, in the secondary market, foreign investors have sold about $25.1 billion, while investing $7.4 billion in IPOs. So they have been very active on the primary side.

What's the real risk of this oversupply?

Yes, lower valuations on IPOs should translate to better outcomes on listing. However, as primary market valuations decrease, it will also impact the valuations of listed companies. For example, if a listed automobile or real estate company is trading at a certain multiple and a similar company comes to market at a lower price multiple, it creates an arbitrage with the higher-valued listed stock.

But how do you factor in the global backdrop? How does that influence your near-to-medium-term positioning?

Global factors have been extremely volatile, particularly in the last couple of years, so you can't base your investment positioning on them. Expectations around the AI trade, US growth and interest rates have swung by large magnitudes in a matter of weeks in recent times. With this kind of volatility, it's hard to build a thesis around global macro. Of course, we must track growth in those economies and understand its implications for India, but we can't simply apply the trends in global markets to India. We must stay focused on growth drivers we observe domestically, areas where confidence in medium-term growth is strong, and whether valuations support the investment case. For instance, over the past three years, we have been expecting a US recession that has yet to materialize. Similarly, even as the dollar weakened significantly this year, it didn't result in foreign capital inflows to India, which highlights the difficulty of positioning purely on global cues.

What do you make of the new Fed Chair? Do you expect any volatility around the announcements that come with the transition?

An announcement by itself may not trigger volatility. However, after the appointment, if the decision-making process deviates from the general principles of the Federal Reserve, the market will experience a heightened degree of volatility. As of now, we see even under the current Fed Chair, the US has been cutting rates. So I don't think the announcement alone will trigger any sharp reaction. But if there are visible signs that decision-making is going to change, that can have implications not just for the equity market, but also for debt and currency markets. As we discussed earlier, surprisingly, India didn't benefit much from the dollar depreciation this year; however, in my view, India's overall positioning looks better for next year. If there is another pullback in the dollar index, it should translate into better FII flows into India.

You mentioned that we should watch which sectors might benefit from the trade deal. So, in your view, which sectors stand to gain?

Traditionally, India has a couple of export-heavy sectors such as textiles and gems and jewellery, but their impact on the economy is limited, and even less so on the stock market. Currently, the electronics sector appears to be a key beneficiary. Its contribution to GDP is still small, but it's a major focus area for domestic industry and policymaking, and many global companies are looking to set up capacity here as part of the diversification and China-plus-one strategy. So from a market perspective, the electronics EMS and auto ancillary sectors look well-placed to benefit.

Which of the sectors are poised to outperform in terms of earnings?

For next year, earnings growth for the market is quite broad-based, with virtually every sector contributing to the earnings recovery. This increases our confidence in the earnings recovery, as it doesn't hinge solely on one or two sectors. Growth is coming from sectors such as automobiles, financial services, cement, and NBFCs (Non-Banking Financial Companies). In many consumer discretionary categories, GST rate cuts have led to a pick-up in sales numbers. Even the energy sector is contributing. So you're actually seeing multiple pockets driving growth, and that's why I'm more confident that 15-16% earnings growth is possible in FY27—because it's not coming from just one sector. If something goes wrong and one particular sector's outlook weakens, then growth wouldn't suddenly disappoint.

Are there any sectors where earnings have fallen short?

I believe one sector that has seen earnings disappointment is the power segment. Even most consumer sector companies have disappointed in the first half, but post-GST cuts revival is expected in some pockets. Power demand growth this year has disappointed, though largely due to seasonality. I don't see this as a structural issue with ongoing industrialization, AI data centre, and the broader energy transition; power demand shouldn't trend lower. These are just a few weak months, and demand should bounce back.

Are you raising your cash levels?

We haven't held unusually high cash levels for many months. It's been around plus or minus 4-5%, which is pretty average.

Are you deploying right now?

So it's not that we're cutting cash levels. And as I mentioned, froth in the primary market has eased, and we're also participating selectively in IPOs.

So how do you create alpha for a mutual fund when the market is flat, and valuations have moderated, yet the upside remains constrained?

When the market becomes more rotational, generating alpha becomes tougher because there are no clear themes to ride. In such an environment, the key is to avoid sectors where there's a risk of disappointment because if you're positioned there, the corrections can be quite sharp.