ETMarkets Smart Talk: Generative AI, defence, and semiconductors among top themes for 2H2025, says Saurabh Pathak

Time of India

7 hours ago

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In the latest edition of ETMarkets Smart Talk , Saurabh Pathak, Head – Investment Counsellor at Purnartha PMS, shares his expert outlook for the second half of 2025.Despite global uncertainties and near-term volatility, Pathak remains optimistic about India's structural growth story and highlights Generative AI, Defence , and Semiconductors as key high-conviction investment themes for H2.With rising enterprise adoption of GenAI, strong policy push in defence manufacturing, and emerging chip fabrication projects, these sectors are poised to benefit from both global megatrends and domestic reforms.Pathak also sheds light on valuations, FII flows, rate trajectory, and the ideal asset allocation strategy for long-term investors navigating a dynamic macro environment. Edited Excerpts –A) Yes, while Indian equities ended May on a strong footing, June has brought noticeable volatility, primarily driven by heightened geopolitical tensions.Concerns over potential supply disruptions in key commodities, escalating conflicts in the Middle East, and uncertainty across major global economies have started to weigh on investor sentiment.That being said, this volatility appears to be more sentiment-driven than fundamentally structural. India's core macroeconomic story remains solid, supported by stable consumption trends, healthy corporate earnings, and resilient domestic demand.However, it's important to not forget India's vulnerability to crude oil price shocks. As a country that imports the bulk of its oil needs, any sustained increase in crude prices can exert upward pressure on inflation, widen the current account deficit ( CAD ), and create short-term headwinds for equity markets. We've seen early signs of this playing out during June.A) As we near the end of H1 2025, the outlook for the second half remains constructive but not without headwinds. India's domestic growth engine continues to hold firm, supported by robust consumption, government-led capex, strong tax revenues, and improving corporate fundamentals.Earnings visibility is strengthening, particularly in banking, capital goods, industrials, and consumer staples, with the BFSI sector likely to maintain momentum on the back of stable credit demand and healthy asset quality.From a market standpoint, while valuations especially in mid and small caps appear stretched, they could be justified if earnings growth persists.Hence, selective, bottom-up stock picking is expected to outperform broader market strategies. I expect moderate but steady equity returns in H2, with intermittent corrections creating favorable entry points.A) Yes, the second half of 2025 is expected to benefit from global megatrends and India's ongoing structural reforms, offering several high-conviction investment opportunities.One key theme is the rapid adoption of generative AI and automation, with over 64% of Indian enterprises prioritizing GenAI initiatives. BFSI is leading this shift, creating long-term potential across tech, cloud, and automation platforms.Domestic consumption remains resilient, bolstered by middle-class tax relief and improving rural demand. This is favorable for financial stocks, especially with credit growth picking up and interest rates stabilizing.Additionally, India's focus on semiconductors and defence technology is strengthening, with new chip fabs underway and defence manufacturing projected to grow 15–17% in FY26, backed by a ₹1.92 lakh crore capex push.Finally, sectors like healthcare and consumer staples are positioned for steady growth, supported by stable demand and controlled inflation.A) Crude oil prices have remained volatile in recent weeks. Given the geopolitical fragility and constrained supply-side flexibility, the outlook for crude oil remains cautiously upward biased in the near term, although moderated by demand-side uncertainty from a sluggish global recovery and interest rate sensitivities in key economies like the US and China.India, which imports more than 85% of its crude oil requirements, is particularly vulnerable to such price shocks.Any disruption in supply chains or escalation in regional conflicts can significantly push up oil import bills, thereby pressuring the country's current account deficit (CAD) and fiscal position.For instance, according to ICRA, a $10/bbl increase in average crude oil price during FY2026 can expand India's net oil import bill by approximately $13–14 billion, which would widen the CAD by nearly 0.3% of GDP.Higher crude prices also have a cascading effect on domestic inflation, especially through higher transportation and manufacturing costs. This, in turn, compresses corporate profit margins particularly in oil-intensive sectors such as aviation, logistics, FMCG, and manufacturing ultimately impacting earnings growth.Companies with high input costs may find it challenging to pass on the increased burden to consumers in a demand-sensitive environment. So, if oil remains above the $80/bbl mark for a sustained period, downward revisions to GDP forecasts could be warranted.A) We are finding sectors like IT services, select pharmaceuticals, and utilities very attractive as on today. The IT sector, especially mid-tier names, offers reasonable valuations after the recent correction and could benefit from potential recovery in global demand.Pharma is attractive from a defensive standpoint with steady earnings visibility and reasonable pricing. Utilities, particularly power and energy transition plays, provide stable cash flows and are trading at fair valuations considering their long-term growth prospects.Additionally, pockets within capital goods and select auto ancillaries also seem interesting as they offer a combination of reasonable pricing and structural growth drivers.A) In May 2025, India attracted $2.29 billion in bond inflows, highlighting its role as a key destination within Asia during the global rate-easing cycle. Equity flows also rebounded sharply in March and April, coinciding with expectations of coordinated easing by central banks.Foreign Institutional Investors (FIIs) appear to be recalibrating their outlook on India positively as the global monetary environment transitions into a softening phase.With expectations of interest rate cuts in developed economies like the U.S. and a dovish bias from the Reserve Bank of India RBI ), India's relative macro stability and return potential are becoming more attractive to global investors.I feel, while rate cuts may not immediately translate into sustained buying, the broader trend indicates increasing comfort with Indian assets especially in rate-sensitive and domestic-facing sectors.A) Yes, fresh investments can be made in 2H2025, preferably through staggered allocations. Timing the market is less critical for a 30-40 year horizon; the key is to remain invested with discipline and diversify effectively across asset classes.While markets have seen some volatility recently due to global factors, long-term investors should view intermittent corrections as opportunities to accumulate quality assets.As far as an ideal asset allocation is concerned, long-term investors can consider higher equity weights (50–60%), with tactical use of gold and alternatives.A) I think this proactive and front-loaded rate reduction appears to have given an initial boost to consumer demand, particularly in sectors like retail lending and auto financing.RBI has definitely made a decisive move by lowering the repo rate by 50 basis points to 5.50% and also cutting the Cash Reserve Ratio (CRR) by 100 basis points, injecting substantial liquidity into the financial system.The timing of this policy adjustment was well-calculated, and it is expected to support consumption growth. However, the long-term effectiveness will depend heavily on how smoothly the lower rates are transmitted and whether banks maintain a healthy flow of credit to borrowers.So, this may lead to providing noticeable relief to consumers through lower EMIs and reduced borrowing costs. Also, more immediate positive effect on MSMEs, retail borrowers, home buyers, and those seeking gold loans, while large-scale private investments may take longer to respond to these monetary adjustments.(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)