Bhalchandra expects the initial months of 2026 to continue seeing the current trend of large caps outperforming mid and small caps – he expects rotation only in the second half of the year as the economic growth momentum gradually picks up.
Be prepared for sector rotation as well: current favourites like auto and metals may cede leadership some months down the road to industrials, power, defense and later in the year to services sectors.
MO’s Services Fund has got off to a strong start in its first 6-7 months, delivering an 11% return vs 5% of the BSE500TRI. Focus on domestic consumer services stocks has been a key driver of outperformance.
Within IT services, Bhalchandra believes companies that invest in capex to tackle the challenges of AI led disruption will emerge likely winners. Existing IT service and revenue models will likely fade away in the coming years. Agile mid and small cap players will be able to adapt faster than large cap companies.
Within financials, he is not focusing on banks as the rate cut cycle is not yet over – which means NIM compression can still continue, putting pressure on earnings. He prefers capital market stocks, exchanges and fintechs.
In the Services Fund, he is currently adding differentiated midcap IT services companies and fintechs and trimming positions in hospitals and aviation. Banks are likely to come into his consideration within the next 3 months.
MO’s Manufacturing Fund has struggled in 2025, delivering-5% 1 yr returns vs +11% of the BSE India Manufacturing Index.
De-rating in power and defense stocks negatively impacted performance. Bhalchandra says power got de-rated due to sharp fall in demand caused by a seasonal fluctuations – he expects demand to come back and believes these stocks will play catch up.
Likewise, while defense stocks sold off, GoI’s continued focus on defense spending – specially in an environment where hostile neighbours are increasing their defense spends - will enable these stocks to bounce back.
Focus on EV autos didn’t pay off as ICE autos demand shot up post GST cuts. Bhalchandra has corrected this balance.