The Case for Being Selective

While the index remains largely unchanged this year, a specific set of businesses doesn't. Here's where they are, and why the opportunity now extends beyond India.

When growth slows and the easy tailwinds disappear, something functional happens. Businesses that had been coasting on a rising tide stop coasting, and for the first time in a while, you can see which ones were actually built to move on their own.

That's not a metaphor, it's mechanics. Pricing power that never had to be tested, gets tested the moment a company raises prices and finds out whether customers stay. Balance sheets that never had to be disciplined, get exposed the moment debt servicing stops being an afterthought. Stagnation doesn't create the gap between good businesses and average ones. That gap was always there. It just removes what was hiding it. This is what's been happening beneath this year's near-flat index. 

Businesses with real pricing power have held margins while input costs rose elsewhere, not by luck, but because that's precisely what pricing power is designed to do under pressure. Businesses with low leverage have stayed untouched by a rate environment that's been squeezing over-leveraged peers, a difference that cost nothing in good years and is paying off directly in this one. And businesses with real capital discipline didn't wait out the slowdown, they used it, taking market share while competitors sat still.

The same filter is running beyond India's borders. AI infrastructure, supply chain reshoring, the energy transition, none of these are rewarding entire markets, they're rewarding specific businesses inside them. A portfolio built only around India's cycle isn't just concentrated in one geography. It's sitting out a second filter that's already sorting winners elsewhere, right now.

Markets tend to eventually catch up to what earnings have already proven, the index re-rating around the businesses that survived the test, not the reverse. The opportunity this quarter isn't waiting for that catch-up. It's being positioned in what the filter has already selected, at home and abroad, before the index gets there. Here's how we're positioning your portfolio for it.

India Macroeconomy

1. Business activity is expanding & absorbing cost pressure: The Composite PMI held at 51.8 in May, with manufacturing at 52.6, its second consecutive monthly rise, even as over 80% of surveyed firms reported higher input costs from the West Asia conflict. That combination matters: expansion continuing despite cost pressure is a more credible signal than expansion in a benign environment.

2. Investment Activity (Capital Goods IIP): Capital goods output within the Index of Industrial Production has consistently grown faster than headline industrial production through the year, and by a wide margin in the most recent reading. That gap matters. Businesses expanding capital goods output faster than general production are typically committing to future capacity, not simply running existing lines harder to defend near-term earnings. Growth in overall IIP has been uneven month to month, and that volatility is worth acknowledging. But the capital goods trend underneath it has been more consistent than the headline number suggests.

3. Oil Pushed the Deficit Up: May's merchandise trade deficit grew year-on-year, but the cause matters more than the number: it was driven almost entirely by higher crude oil prices, not by exports losing ground. Exports actually touched $45.2 billion in May, the highest in recent years, and the growth wasn't concentrated in one place, exports to China grew in double digits even as exports to the US held flat.

Together, these numbers point in a consistent direction, cautiously so.

Businesses are still expanding, even while absorbing higher costs. The ones investing in future capacity are doing so faster than the broader industrial base. And the one number that looks like bad news, a wider trade deficit, turns out to be a price effect from oil, not a sign of weakening demand. None of this means the pressure is gone, input costs, export orders, and global uncertainty all remain real, and we're watching each of them closely.

1. Market Movement: Indian equity markets declined through May and early June on US-Iran uncertainty, elevated crude prices, and a below-normal monsoon forecast, then found support in mid-June as peace talks progressed and crude eased, support, not a full recovery back to earlier highs. What the index didn't price in: aggregate operating profit growth for listed private companies accelerated from 7.2% to 11.2% year-on-year in the same quarter markets were busy discounting geopolitical risk.

2. Global markets are being carried by tech: US equities were pulled in both directions through May-June, strong earnings and ceasefire hopes on one side, a hawkish Fed and tech-valuation concerns on the other. Through it all, technology stocks remained the primary driver of the S&P 500, well ahead of every other sector. That shows real conviction in AI-led growth, but it also means the market's strength is narrower than the index suggests.

3.What This Means for Your Allocation:  Given this environment, we've deliberately shaped your portfolio around specific opportunities rather than broad market exposure, with capital preservation through this turbulence as much a priority as growth. Within India, that means selective businesses across market cap orientations, large-cap names with genuine pricing power and clean balance sheets built to absorb cost shocks without passing the damage on to earnings, and select mid- and small-cap businesses where growth is driven by company-specific execution rather than a rising tide that can just as easily go out. Each allocation is chosen for what the business itself is demonstrating, and that discipline is precisely what limits your exposure when conditions turn uncertain.

Alongside this, we've extended exposure to select global opportunities in markets and themes currently showing genuine momentum, technology and AI-linked growth in particular, rather than adding blanket international exposure. This isn't diversification for its own sake, it reduces how much of your portfolio's performance rests on any single market's cycle or any single geopolitical flashpoint. The intent throughout is the same: fewer, better-chosen positions, at home and abroad, in businesses resilient enough to compound through this environment and secure your capital along the way.

1. G-sec yields firmed on geopolitical risk: The 10-year G-sec yield ranged between 6.92% and 7.13% through May as West Asia talks stalled, then eased to 6.87% by Jun 18. That drop wasn't markets simply calming down, the Government exempted FPIs from long-term capital gains and withholding taxes on G-sec interest, and the RBI opened new 15, 30, and 40-year tenor securities to foreign investment, deliberately clearing the path for capital to enter. Yields easing because policy made room for capital is a sturdier signal than yields easing on mood alone.

2. Borrowing costs eased across the board: Corporate bond yields declined across all credit ratings, from AAA-rated companies to lower-rated BBB-minus issuers. For ex: AAA 1-year yields fell 35 bps, while BBB-minus 3-year yields fell 29 bps. When borrowing costs decline for both high- and lower-rated companies, it signals a broader improvement in financing conditions across the economy rather than just a shift towards safer assets.

3. Credit demand remains strong, but funding will be worth watching: Bank credit continued to grow faster than deposits through May. This suggests that businesses and consumers are still borrowing and investing, a positive sign for economic activity. At the same time, if loans continue to grow much faster than deposits, banks could face higher funding costs over time. 

4. What this means for you: falling yields are good news for your existing bond holdings and cheaper borrowing across the economy, benefits that typically flow through to corporate earnings over time. The one thing we're watching closely is the credit-deposit gap. If credit keeps outpacing deposits, banks may need to raise deposit rates to fund it, which could push yields back up. We're staying selective on duration until that resolves, and will adjust your positioning if it does.