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Saurabh Mukherjea has a simple message for investors in Indian equities: it’s time to look beyond. The chief investment officer and co-founder of Marcellus Investment Managers believes that with jobs in India drying up because of the US tariffs, consumption slowdown, and tepid corporate earnings, it “will be tough for a market already trading at record-high valuations to move any further".

Mukherjea’s solution: A balanced portfolio—one-third each in Indian equities, US smallcaps and midcaps, and gold.

In this interview with Mint, Mukherjea, one of India’s most closely watched fund managers, also discussed the US tariffs, its impact on Indian jobs, and domestic sectors where he still sees opportunities. Edited excerpts:

The biggest challenge for India right now is that earnings and profit growth have slowed sharply over the last two years, mainly because white-collar job creation has stalled—even shrinking with IT layoffs. Around 40 million white-collar workers indirectly support another 200 million in services, forming the backbone of India’s consumption engine.

With jobs drying up, consumption, which is 60% of GDP, has got jammed, which means earnings growth has slowed. And with earnings not growing, it’s tough for a market already trading at record-high valuations to move any further—that’s the core challenge.

That said, the government has responded with tax cuts, GST cuts, RBI (Reserve Bank of India) rate cuts, and a consumption push. But it’ll take a few quarters to show results. The deeper issue remains: AI (artificial intelligence) and automation are reducing the need for white-collar workers, and in a labour-heavy country like India, that’s a structural problem.

Valuations are steep, which is why the market is struggling to move ahead.

Better opportunities lie abroad. US and European small- and mid-caps have delivered double India’s earnings growth over time at half the valuations. Despite Western volatility, this makes a strong case for diversification.

Thanks to GIFT City, investing in Western equities is now cost- and tax-efficient. At Marcellus, we built a Western equities team over three years ago, and many of us now keep half our equity investments in those markets. Over the long run, both India and the US deliver 10–11% dollar returns with low correlation, making a 50-50 equity portfolio far more resilient.

Currently, Western small- and mid-caps are especially attractive: earnings growth averages 11–12% vs India’s 5.5–6%, while valuations are 15–25x vs India’s 30–50x. The mismatch—higher growth at lower valuations—plus, Trump-era fears among Western investors, creates a compelling opportunity for global diversification.

Every major free-market economy goes through cycles. No country, including India or the US, moves in a straight line. India had three strong years post-Covid (2021–23), but the economy began to slow late last year and hasn’t yet recovered. The core job engine is stuck, and it may take another 4–6 quarters to turn around.

The key point: if you stay invested in just one economy, you’re riding its full boom-and-bust cycle. Most investors buy at peaks and exit at lows. The solution is to diversify across economies with different cycles. For instance, while India has slowed, the US economy remains strong with solid credit growth, job creation, and record-high markets.

Those fully invested in India have had a tough year, while those with a balanced India-US portfolio have fared better. The same logic applied to US investors between 1967 and 1984—US equities gave zero returns in those years.

That’s why a 50-50 allocation between India and the US makes sense. It helps you earn steadily, reduce stress, knowing your portfolio is balanced and performing.

Other equity markets don’t offer the same low correlation with India as the US does. For example, India and other developing countries are more tightly correlated due to similar emerging market dynamics, while India and the US differ significantly—tech-driven vs labour-driven economies; parliamentary vs presidential systems; market-led vs bank-led financial systems; and income levels. These differences make the US equity markets an ideal diversifier.

Actually, gold is another diversifier. Its correlation with India is low, though long-term returns (6–7% in dollars) are lower than US equities (10–11%). A portfolio split [across] roughly one-third India, one-third US, one-third gold can deliver 12–13% dollar returns (14–15% in rupees) with lower volatility.

However, gold is currently expensive due to global risk fears—Trump, geopolitical tensions, and Middle East conflicts. So it’s better to wait for a price drop before increasing allocation.

For diversification today, if you already hold India and gold, make them one-third each, and allocate the final third to US small- and mid-caps, which are trading at a 26-year low relative to the S&P 500. If you only hold Indian equities, diversify 50% India, 50% US small/mid-caps, and wait for a better time to add gold.

If you already have gold and it’s more than a third of your portfolio, bring it down. The bulletproof portfolio will be: India one-third (Nifty 50), US one-third (S&P small- and mid-cap), and gold one-third.

Think global: Don’t rely solely on India—allocate part of your portfolio to U.S. and European equities.

Three-pronged portfolio: One-third Indian equities, one-third U.S. small/mid-caps, one-third gold balances growth and risk.

Targeted opportunities: Healthcare, top private banks, and consumer-driven sectors still show strong potential.

Gold as a hedge: Keeps portfolio resilient, but wait for price corrections before increasing allocation.

Domestic challenges: Be cautious of the slowdown in white-collar jobs in India; it's slowing consumption and corporate earnings.

It depends on the market. As a global investor, a diversified portfolio across India, the US, and gold can still deliver double-digit dollar returns over the next 3–4 years. But if you stick only to India, which is just 3% of global market cap, the next few years could be tough.

Earnings growth looks weak, and the job market is rebalancing in India. The traditional white-collar employment model is fading, and India is transitioning to a professional gig economy, enabled by low-cost broadband, UPI, and GST.

During this transition, earnings growth and stock market returns may remain subdued, but that’s not a problem if you diversify globally.

I do think India and the US will eventually reach an FTA (free trade agreement), but until then, the 50% tariffs imposed by the US are hurting workers. I saw the impact firsthand in Tirupur and Eastern UP (Uttar Pradesh)—textiles, handmade carpets, gems and jewellery, leather, jute, and sports goods are all disrupted, affecting 20–30 million workers.

Unless relief comes by November, these tariffs could lead to job losses and drag down consumption. The government’s consumption stimulus may kick in over the next 3–6 months, but a large part could be offset by the tariffs.

We’ve been actively investing in domestic healthcare for the past 7–8 years and continue to find opportunities there. With the Ayushman Bharat scheme (public health insurance) and employer-provided Medicare, most healthcare will be delivered by the private sector, benefiting hospitals, diagnostics, medical devices, and pharma.

The second focus is on the top three banks—HDFC, ICICI, and SBI. The banking sector is likely to become a three-horse race, with others fading. Non-performing assets may rise elsewhere due to white-collar job losses, but these three banks should perform well, forming 30% of the index. We have invested in HDFC Bank and ICICI Bank in various portfolios.

The third area is consumption, boosted by a government stimulus of around $80 billion (1.7% of GDP) over the next 3–4 quarters, benefiting FMCG (fast-moving consumer goods), autos, and consumer durables.

Conversely, government capex (capital expenditure) will remain weak due to falling tax collections and fiscal recalibration, pressuring stocks tied to PSUs (public sector undertakings, or state-run companies), contractors, defense, railways, and roadbuilders.

Carysil (a Mumbai-based maker of kitchen sinks) has performed very well for us, doubling in the last 12 months. Around 25–30% of its revenue comes from US exports, mainly quartz sinks, which are high-quality but 30–40% cheaper than German competitors like Schock. Global retailers such as Ikea and the US company Karan source from them.

We bought [shares in] Carysil two years ago, and while domestic consumption looks strong, the US tariff situation is concerning. Given the high valuations and stock run-up, we have tapered our position over the past month.

Yes, that’s typical. After 2020–21, people started investing heavily post-lockdowns. Even as the economy slowed two years ago, mutual fund inflows remained strong at $30–40 billion annually, creating a disconnect between high valuations and weak fundamentals. Retail participation is also at a record high.

We’ve missed out on the outsourced manufacturing space. We’ve watched Dixon Technologies with admiration for years but never managed to get in. It’s a solid company—one I wish we’d spotted earlier. In my view, the outsourced electronics industry today is where outsourced pharma was 20–25 years ago.

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