Fed hike won’t derail markets; Arvind Sanger sees broader opportunities beyond Nifty

Arvind Sanger, Managing Partner of Geosphere Capital Management, expects the US Federal Reserve to likely raise rates by 25 basis points, but believes a single rate hike is unlikely to derail markets if earnings growth remains strong. He sees the artificial intelligence (AI) boom and related capex continuing to drive growth, although a slowdown in AI spending could become a major market risk in 2027.

On India, Sanger sees opportunities broadening beyond the Nifty, with midcaps and smallcaps showing stronger earnings growth. He favours manufacturing companies with export exposure, domestic healthcare, select NBFCs and banks, while also watching Indian IT companies that could benefit from AI implementation.

This is an edited transcript of the interview.

Q: It was one of those days in the US markets where good news in the economy was bad news for the stock market. The US jobs report was very strong, almost three times what the market was anticipating. What's your assessment of the global setup now?

A: We have inflation fears. I think the employment side was slightly helpful in terms of creating more confidence that maybe the Fed can, maybe I don't know if it's confidence or otherwise, that Fed can raise rates. But the important number is going to be the Consumer Price Index (CPI) number coming out this Friday, September 11.



And I think, right now, it's slightly better than 50% odds that the Fed will raise rates in a couple of weeks' times when they have their next Fed meeting in a week and a half. But the reality is that with oil continuing to rise, the inflationary pressures are rising. Therefore, it’s very much risk-off a little bit on concerns that the Fed would raise rates.

But the reality is, if earnings growth remains fine, one Fed rate increase is not going to kill this market.

Q: So, are you in the camp of a rate hike or not?

A: I would say probably it is likely, given where energy and other factors are going. I think it looks increasingly likely that they'll do one.

Whether that'll cause any major disruptions in the market, I think the market will have a short-term adjustment, but beyond that, the earnings growth story is being driven by earnings driven by AI capex and other factors, and I don't think that'll be impacted much by one rate hike.

Q: Have you checked out OpenAI's Astra model?

A: Not yet. I've been hearing great things about it, but I haven't yet tried it. I'm not quite a frontier model guy. I still use other models. But my sense is that things are getting better faster.

So, there are some questions about cost versus effectiveness of all these frontier models. But the reality is that I think this is going to continue.

Q: Is that the big growth driver in the US at this point, this entire artificial intelligence (AI) boom?

A: The whole AI boom and the attendant spillover effects, whether it is engineering construction companies or it is companies providing memory or providing chips or providing a number of other things. The capex is so strong by these companies, and the revenue offtake, what we're seeing from numbers from Anthropic and now OpenAI and others, is that there's fast adoption.

So, you've got this virtuous cycle going. I still am a little nervous that the magnitude of spending could slow down at some point. I don't think it's imminent, but it could slow down in 2027. And will that cause more of a disruption to the market? I think that's a bigger question mark when that happens.

I don't think it's imminent, but if that happens in the future, that could cause a major correction in the market. The Fed raising rates by 25 basis points will not.

And the other wildcard is, obviously, what's going on in West Asia with the Iran war, whether that causes anything major to happen. So far, it's remained a background noise, irritant, it causes inflation higher, but it hasn't upset any global growth benchmarks as yet.

So, I think, so far, AI seems to be overwhelming any other concerns.



Q: I don't know if you saw this barrage of posts by President Trump. Some of them came back-to-back-to-back. There was one about the name of New Mexico, and another about making hundreds of billions of dollars in stocks for the country, not for himself, but not being appreciated by the radical left. There were a few others, including some pictures. So, not just you and me, but President Trump is also using AI.

A: Well, I'm not sure what he's using, but he probably should spend less time tweeting and more time worrying about other things that are important.

One of the biggest risks in the US right now is this whole political backlash that is going on against AI data centers. And I think that is one of the risk factors in the US growth story is that, you know, if the Democrats get a big swing in their favour in the midterms, will that stymie AI data center build-out?

And that's one of the risks that people have worried about a little bit in the recent past. But President Trump is worried about renaming stuff. But I think he needs to be worried more about the implications of this AI data center backlash on what that could mean.

And also, the Iran war, I don't think there's a clear answer there. So, those are two big problems that the market faces, and the economy could face, especially if the AI backlash on data centers starts to have a meaningful effect on the rate of growth of AI innovation in the US.

Q: What about India? The gross domestic product (GDP) and the April-June quarter of 2026 (Q1FY27) earnings were strong, while goods and services tax (GST) collections have also been good. Yet, markets have underperformed. What's your view on Indian markets, both the index and individual sectors? Do you see opportunities, especially given your earlier view on IT services?

A: I mean, even the IT services, they're always select stocks. See, what I love about India is there's always some interesting bottom-up stories to play, and it's not just at the index level. But even at the index level, if you look at what's happened, we were looking at BSE 500 versus Nifty. And BSE 500 is trading at a significant premium to Nifty.

So, the midcaps and the small caps are now trading at much higher multiples and are showing better earnings growth. So, I think in a sense, maybe the Nifty is the laggard, and maybe for good reason because the earnings growth is not as dramatic.



But what we are seeing is a broadening out of this midcap and smallcap rally and of the earnings growth. And therefore, maybe Nifty being flat is not as important as what is going on at the small and midcaps. And that may be where the real momentum of growth story lies.

And so, we're finding opportunities there for growth. And to the extent the market is somewhat circumspect, it gives... And maybe part of it is concerns about, again, inflation. You got a bad monsoon, you got high oil prices. All of these are headwinds.

But like you said, the earnings growth this last quarter was very encouraging, and we're seeing opportunities in companies that are doing well in the small and midcap space. So, we're less focused on Nifty as the barometer of what the Indian economy is doing.

Q: Do you want to quickly name a couple of them from the broader markets? Some themes, stocks that you've liked since there are opportunities, and the index is telling us that as well, that the mid and the small caps are much higher in comparison to what the Nifty has done this year?

A: I think we are finding in manufacturing industry, especially with an export orientation with a benefit of what's going on from a global data center build-out, that would be a niche that we like.

Another niche that we like is domestic healthcare-facing companies, whether it is domestic pharmaceuticals or domestic companies in the kind of drug retail outlets. There are pockets where things are going swimmingly well.

And I think even in the financial space, select non-banking financial companies (NBFCs) and select banks, I think things are starting to look much better.

Watch the full conversation here



So, I think there's a few sectors where things are looking pretty good. And even in IT, although we don't have exposure right now, we're looking very closely at some companies that are going to be helping with implementing AI. I think there's going to be winners in India there, too.

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