Aditya Khemani: Be Selective as AI, defence and power themes push valuations higher

# What happened India's mid- and smallcap rally has been led by newer themes — artificial intelligence, defence, power, data centres and manufacturing. These segments have delivered strong returns while many traditional sectors such as consumer staples, banking and IT have lagged. Aditya Khemani, Head of Equities at Invesco Mutual Fund, says that this has produced a highly polarised market with pockets of expensive valuations.

# Why it matters When market gains are concentrated in a few themes, the risk of confusing short-term earnings momentum with sustainable business quality rises. That makes stock selection and valuation assessment more important for investors who want to avoid buying into stretched narratives.

# Khemani's practical advice

• Treat earnings momentum as a signal, not proof of quality. Momentum can drive prices higher short term but may hide underlying weaknesses.
• Look beyond reported earnings to cash-flow metrics. Weak cash flows paired with stretched valuations are warning signs even when earnings appear strong.
• Be selective across and within sectors. Emerging sub-segments of a sector can outperform traditional ones, and there is limited rotation between the two.
• Maintain valuation discipline and focus on the long-term economics of businesses rather than chasing the latest market narrative.

# Macro and market context Khemani notes that expanding domestic liquidity in India provides a cushion if foreign institutional investors (FIIs) step back, reducing the chance of prolonged FII-driven sell-offs. Still, higher global yields and other external pressures can influence sentiment and price discovery, making fundamentals-based selection necessary.

# How investors should act now

• Prioritise companies with resilient cash flows and reasonable valuations. Avoid relying solely on momentum as justification for new positions.
• Screen mid- and smallcap opportunities carefully: identify business models with durable demand and capital efficiency rather than those riding short-lived themes.

• Keep a medium- to long-term view on the economics of businesses rather than timing short-term narrative cycles.

# Bottom line The current market shows concentrated leadership in new-age themes and limited rotation to traditional sectors. That environment raises the premium on selectivity and valuation discipline. Investors who focus on cash flows, sustainable business economics and reasonable prices are positioned to avoid common pitfalls when narratives and momentum dominate market headlines.