PGIM's Mohit Khanna Identifies Three Potential Outperforming Sectors

Market Uncertainty Persists Amid Ongoing West Asia Conflict

The ongoing conflict in West Asia has left the markets navigating uncertainty, with Indian markets having made an intermediate bottom and recovered almost halfway since March 2026. Amid this chaos, Portfolio Manager – PMS at PGIM India Asset Management Mohit Khanna is maintaining slightly higher cash levels in the portfolio, which can be utilized to buy fundamentally strong companies at attractive prices.

The situation in West Asia remains fluid, with conflicting news flows and the first round of peace talks having failed. The frequency and potential impact of news flows remain very high, resulting in elevated volatility. Both the government and private sector are adjusting to a new reality, with elevated energy prices and supply disruptions in Middle East waters potentially persisting longer than previously estimated.

Market Outlook and Investment Themes

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Khanna believes that the power sector should continue to do well in the coming years, driven by the National Electricity Plan's (NEP) ambitious targets for capacity additions. The sector is expected to benefit from increased traction in both renewables and non-renewables, with transmission, including the wires and transmission segment, being a key area of focus. The optimism is supported by a surge in consumption due to increasing data centers, urbanization, rising domestic consumption, electric vehicles, manufacturing activity, and other factors.

In terms of investment themes, electrification and power, EMS and data centers, select private banks, and the two-wheeler segment are likely to emerge as prominent themes over the next few years. Textiles, metals, and IT could act as potential "dark horse" sectors and may outperform.

Comparison of PSU Banks and Private Banks

Private banks offer better valuations compared to PSU banks and NBFCs. PSU banks rely heavily on non-core income, which is becoming a headwind due to hardened G-sec yields in CY26. In contrast, private banks derive the bulk of their profits from core banking operations, making earnings more predictable and less dependent on rate cycles. PSU banks operate at 12-17x leverage, whereas large private banks operate at 6-9x, creating asymmetric downside risk for PSU bank earnings.

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Investment Strategy and Portfolio Churn

Khanna has increased portfolio churn slightly during the recent market downturn followed by the recovery. This is because unfolding events could potentially create a large delta in earnings. To benefit from heightened volatility, the portfolio has created cash and redeployed it swiftly and timely.

CPI Inflation and Market Impact

The West Asia conflict has reduced production of oil and gas, fertilizers, and other chemicals across the value chain, impacting transportation due to the closure of the Strait of Hormuz and airspace of multiple countries. The risk to global inflation is real, and the actual impact of the conflict on inflation depends on its longevity and severity.

In conclusion, the market remains uncertain, with elevated energy prices and supply disruptions persisting longer than previously estimated. Investors must remain watchful of valuations and avoid overpaying.