Supply in the market is a concern, said Hari Shyamsunder, vice president and Senior Institutional Portfolio Manager – India Equities, Templeton Global Investments, Franklin Templeton.“It’s not just about the aggregate quantity being sold, but the pace at which that supply hits the market, which can cause short-term dislocations.“

The challenge now is the sheer volume of equity, from potential government divestments to promoter and foreign institutional investor (FII) sales, all of which are adding up, he explained. “It (oversupply) has helped cap valuations in the secondary market.“

Edited excerpts:

Q 1) Is there anything you would like to add or highlight?

Supply in the market is a concern. It’s not just about the aggregate quantity being sold, but the pace at which that supply hits the market, which can cause short-term dislocations.

For instance, in 2024, more than half of the initial public offerings (IPOs) for the year, in terms of value, occurred between mid-October and mid-December. At the same time, FIIs were also exiting. So, even if domestic inflows look healthy, they don’t reflect the near-term churn such concentrated activity can trigger.

That’s what can pressure markets; multiple players acting at different times without coordination, leading to short-term volatility. However, if supply comes in an orderly and spaced-out manner, it’s manageable. The challenge now is the sheer supply of equity, from possible government divestments to promoter and FII selling, all adding up at once.

Q 2) Although we’re near all-time highs, don’t you think a fall is likely?

I’d flip that and say, if these IPOs hadn’t happened, existing stocks would’ve been much higher. So, despite valuations, IPO activity has, to some extent, helped cool the secondary market. It’s a kind of self-corrective mechanism: when supply rises, valuations ease. We’ve seen that this year too: whenever markets dipped, supply pressure also moderated.

Q 3) So, is the oversupply actually helping bring some sanity to the market by stabilising valuations?

It has helped cap valuations in the secondary market.

Q 4) That said, are you noticing a surge in wealthy investors in any particular regions—say, specific cities or states?

For mutual funds, I think this has been seen in state capitals, although not limited to them. I’ve travelled across almost all states, barring a few in the Northeast, and the message is consistent: growth is tremendous. Beyond the metros, state capitals such as Bhopal, Patna, Lucknow, Chandigarh, and Jaipur are witnessing a surge in investors. These cities are becoming vibrant investment hubs, with growing participation and “problems of plenty“.

Even smaller centres beyond capitals, like Coimbatore in Tamil Nadu, are showing strong momentum. So it’s not just the big cities; growth is spreading rapidly across regions.

Q 5) During your work trips, was there any particular incident that stood out to you?

So I was visiting Rajkot a couple of weeks back. One of the good parts about travelling is that you really get a sense of what’s happening on the ground. I travelled soon after the GST (goods and services tax) cuts, and it was good—I received some solid feedback. Dealers in the North were saying they’re facing supply issues, which points to a strong pickup in demand.

For instance, one partner mentioned they’re struggling to find AC mechanics because the pickup has been so sharp since the GST cut. These are powerful anecdotes to take away, especially when you’re usually stuck in the metro bubble. Tier-II cities give you a different flavour—it’s not just Mumbai or Bengaluru seeing this momentum; the pickup is clearly broad-based.

Q 6) How do you translate that perspective into your investment strategy, particularly in terms of company selection?

You don’t rely too much on one or two pieces of feedback. This is a question we often get as portfolio managers. For example, take autos—you can call distributors across the country and get a sense of demand, but you can’t just plug that into a model and say the industry will grow x% next month. It doesn’t work that way.

As long-term investors, we look for granularity. When speaking to dealers, the key questions are: how are different models performing, how are customers reacting to new launches, and why are they buying or not buying certain or old models? If a new model isn’t doing well, what are competitors doing differently?

These conversations help us build a broader, more qualitative picture. We then check if similar patterns appear elsewhere, which helps shape our medium-term view and stock picks. So it’s not about the quantity of data, but the quality of insights that guide our buy or sell decisions.

Q 7) From these conversations, did any sectors catch your attention?

Yes, one broad theme that stands out everywhere is premiumization—a very powerful trend playing out across sectors. Whether in Bihar or Bengaluru, demand for premium appliances and consumer durables is rising disproportionately.

If you look back at the 1990s and 2000s, most advertising focused on staples and basic luxuries. Today, those categories are well-penetrated, and companies are pushing higher-end products. Even paint companies, for instance, are highlighting premium finishes and variants. Indians today are buying not just what they need, but what they want.

This is also driving the shift from unorganised to organised markets. Compliance has helped, but there’s also a clear aspiration that people are willing to pay extra for branded, better-quality products. Even after the GST cuts, companies note that consumers prefer upgrading to higher-end models.

The trend goes beyond consumer discretionary, and is also visible in real estate, where buyers are moving toward organised developers and better homes despite higher prices. Premiumization, in that sense, is a structural, economy-wide shift.

Q 8) Would you say the market as a whole is still pricey?

Midcaps trade around 27-28 times earnings at the index level, while small-caps are harder to assess due to index skew. Large caps are above historical averages, but lower inflation volatility, stable rates, and a structural decline in the cost of capital justify some re-rating.

Valuations may adjust slightly as inflation and rates normalise, but fundamentals remain healthy. Midcaps continue to justify their premium with stronger double-digit earnings growth compared to high single-digit growth for large caps.

Markets aren’t cheap, but many stocks look fairly valued given the improving macro backdrop. Deep bargains are rare, yet several names trade at reasonable levels, factoring in a broader recovery.

Following an 8-10% earnings cut last year, FY26 may see single-digit growth, but FY27 appears stronger at 17-18%, driven by financials. Policy support remains firm, and RBI’s (Reserve Bank of India’s) accommodative stance should aid growth. With credit expansion and normalisation, FY27 could mark an earnings rebound—valuations across several sectors appear fair, not stretched.

Q 9) What key factors or metrics are you closely watching when picking stocks for your portfolio?

Every sector has its own key metrics. For example, volume is critical for agriculture, while order book and execution matter more for construction. In terms of earnings growth next year, financials, especially private banks, should continue to perform well. Consumer discretionary and services are also expected to pick up.

We remain positive about real estate; while it hasn’t done well this year, demand remains strong. The sector can’t be viewed nationally, it’s driven by micro-markets, creating stock-specific opportunities.

In healthcare, it’s a diverse space with exporters, hospitals, CDMOs (Contract Development and Manufacturing Organisations), and diagnostics. We continue to like hospitals, which also benefit from premiumisation trends.

As for capital goods, we’ve been underweight due to valuations, but we understand the medium-term growth story associated with capex. We’re waiting for the right price point to turn constructive.

Q 10) Which segment within capital goods are you waiting to enter—is it cables and wires, shipbuilding, or something else?

I would say across the board because opportunities are likely to be fairly broad-based. One part which has done exceedingly well is data infrastructure, where electrification is a strong theme. The underlying looks good, but valuations look stretched, so that’s one area. Even on the construction side and some names, including defence, we look for opportunities to enter at certain price points.

Of course, this argument can be made across the board, but these are areas where we see secular themes and fairly strong medium-term potential. However, expectations are quite high, and many of these stocks tend to run on order books. Historically, we’ve learned to be cautious, as order-book translation into revenues has often disappointed.

That’s a reason why we’ve been underweight on capital goods: while the story remains strong, the risk lies in execution. Challenges during implementation can pressure balance sheets, stress working capital, and compress margins. The entire cycle that appears promising during the order book phase can become tricky in the execution phase. So, we’re staying watchful, learning from past cycles, and aware that current valuations already factor in some of these risks on the capital goods side.

Q 11) What about the power sector?

We have been positive on the power space in the past, but are now underweight given the valuation parameter. We’re playing it selectively. The renewable energy space is an area we’ve been involved in, with exposure to some of those names. It’s becoming more of a stock-specific, bottom-up story, focused on companies with solid balance sheets, strong execution capabilities, and clear medium-term demand visibility. So, we’re looking to pick selectively on the power side.