Rana Gupta, Senior Portfolio Manager and India Equity Specialist at Manulife Investment Management, identified two key downside risks for the Indian market.

The first risk comes from the potential oversupply of equity paper.

Gupta mentioned that several large initial public offerings (IPOs) are planned for October and November, and if these issues do not perform as expected, they could dampen investor sentiment and lead to a correction in valuation multiples.

“If some of them (IPOs) do not give the expected returns, that could lead to some softening of the sentiment and therefore, some correction in the price to earnings (P/E) ratios,” he said.

Market regulator Securities and Exchange Board of India (SEBI) recently cleared the IPO of food delivery and quick commerce player Swiggy and auto major Hyundai’s $3 billion issue, India’s biggest ever.

The second risk, Gupta highlighted is the outcome of the upcoming state elections, set to take place between now and February.

While state elections don’t directly impact the central government, any results contrary to market expectations could affect sentiment and potentially lead to short-term volatility, he said.

Despite these risks, Gupta doesn’t foresee a significant earnings disappointment and believes that the market could consolidate in the coming months.

Between January and June this year, the stock market has been in a very tight 5% range. Gupta expects a 3-5% consolidation in the next 3-6 months.

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He believes that manufacturing as a theme is peaking out.

Over the last two to three years, railways, defence, and power sector have seen a tremendous rally and their valuations now look expensive.

All these companies are factoring in good execution but that may not be the case on the ground, he noted.

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The Indian government has taken several policy initiatives in electronics manufacturing, energy independence, and so forth.

He sees opportunity in electronics manufacturing because that is a large addressable market in India and globally and it is one of the spaces where the Indian government has taken several policy initiatives.

He also likes the industrial goods sector, and the healthcare sector, in which he sees strong growth opportunities.

For more, watch the accompanying video