Global manufacturers are moving beyond China, a strategy known as "China Plus One." At the same time, Europe is losing its edge in production because of an ageing workforce, high energy costs and rising geopolitical uncertainty. In this context, Invesco MF’s Head of Equity Aditya Khemani argues that a new theme, "Europe Plus One", could drive long‑term investment in India.
Khemani says investors should not let headlines distract them. He sees geopolitical tensions as opportunities to buy quality businesses at lower prices. His focus remains on long‑term fundamentals rather than daily market noise.
India’s biggest structural advantage is its demographics. The country has a young and growing labour pool that gives it a natural edge in manufacturing and labour‑intensive sectors. However, demographics alone are not enough; infrastructure, ease of doing business and policy execution must also improve to unlock the full potential.
Key manufacturing segments that excite Khemani include aerospace, specialty chemicals, electronics manufacturing and pharmaceutical contract development and manufacturing organisations (CDMO). These sectors are likely to benefit as global companies diversify supply chains away from Europe.
India has signed several free trade agreements in recent years. While FTAs improve market access and reduce tariff barriers, Khemani believes they are only a part of the story. Long‑term competitiveness will depend more on building world‑class infrastructure and strengthening logistics.
In the current portfolio, manufacturing plays a role of 16‑18% across pharma CDMO, specialty chemicals, industrial manufacturing and power equipment. The fund aims to grow this allocation gradually, focusing on businesses with strong earnings potential even if their index weight is small.
Other themes that the team favours are hospitals, aviation, quick commerce, financialisation and convenience‑led businesses. Real estate is viewed as a contrarian opportunity because organised developers are gaining market share. The fund remains cautious on commodity businesses and underweights IT services due to AI‑driven uncertainty.
Foreign institutional investors have been net sellers in India for much of the past year. Khemani notes that domestic investors have become a stronger force, reducing India’s dependence on foreign capital. He advises investors not to be overly concerned about FII flows, as they are largely driven by global opportunities.
The earnings cycle is showing signs of recovery after a period of strong growth from 2020 to 2024. Positive surprises in the December and March quarters give confidence that the worst of the slowdown may be behind. Khemani remains constructive on earnings over the next one to three years.
In sum, Khemani urges investors to look beyond short‑term headlines and focus on durable competitive advantages. Manufacturing, hospitals and pharma CDMO are positioned as attractive long‑term themes that can benefit from the Europe Plus One narrative.