Apart from the dollar’s strength and the “US exceptionalism” that has impacted all emerging market flows, the revival of positive sentiment around China’s technology sector (post Deep Seek and softening of Chinese governments’ stance towards the private sector) can impact India’s valuation premium over China and other emerging markets, said Rahul Singh, CIO-Equities, Tata Asset Management.
“It is therefore even more important for the earnings growth recovery to kick-in in FY26,” he added.
He is of the opinion that earnings downgrades might continue at a moderate pace for a quarter or so before the stimulus in the Budget and monetary policy easing start to take effect.
Edited excerpts:
With the Nifty 50 and Sensex having corrected around 12% and 13%, respectively, from their record highs, while Nifty Smallcap 250 is down 21% and Nifty Midcap 100 is 17% away from their peaks; do you see more pain ahead? For how long?
Markets are likely to react more to corporate earnings from here on rather than macros (dollar strength, tariffs, inflation) as Nifty 50 valuations are now only at a small premium compared to the long-term average. We could therefore be looking ahead at a period of sector-agnostic and stock-specific returns for the next 12-18 months where index movements will become secondary. Despite the recent correction in broader markets, mid-cap and small-cap stocks still trade at meaningful valuation premiums. Large caps, therefore, have a better risk-reward with lesser chances of earnings disappointments even as valuations (especially in small caps) have corrected significantly.
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Downgrades are far outpacing upgrades. How long do you expect this to continue? When do you expect corporate earnings to recover?
We believe that the earning downgrades might continue at a moderate pace for a quarter or so before the stimulus in the Budget and monetary policy easing starts to take effect. Going by the reported pick-up in government capex in the current quarter, we might expect economic activity to turn around after a quarter or two. Meanwhile, earning estimates are already quite depressed in Banks, IT, Consumer and Commodities all of which had a low base in FY25; hence the scope for disappointment is low in these sectors. On the other hand, we have seen earnings downgrades in industrials and capex plays as either the topline or margins have disappointed and in some cases order book growth has slowed down too. Recovery in these sectors will be key for meeting the consensus profit growth expectations of around 14-15% CAGR for FY25-27.
Recent actions by the Trump administration have intensified trade tensions and have created uncertainty across various industries.
Beyond valuations and earnings, what are the other key factors impacting Indian equities?
Recent actions by the Trump administration have intensified trade tensions and have created uncertainty across various industries. However, it is a bit too early as the US may apply “reciprocal” levies on a country-by-country basis. We also need to see a further segmentation of these tariffs on certain critical sectors for India like Pharma. Apart from the dollar strength and the “US exceptionalism” which has impacted all emerging market flows, the revival of positive sentiment around China’s technology sector (post Deep Seek and softening of Chinese Governments’ stance towards the private sector) can impact India’s valuation premium over China and other EMs. It is therefore even more important for the earnings growth recovery to kick-in in FY26.
How difficult is finding value in a market like this today?
There is relative value in large caps especially in BFSI and Oil & Gas sectors. Banks have displayed resilience on net interest margin (NIM) even as growth has slowed down. We expect growth to pick up from next year, led by corporate borrowing requirements and easing liquidity in FY26. On the other hand, despite the concerns about unsecured lending, the increase in NPLs (Non-Performing Loans) and credit cost has been modest and has not provided any negative surprise in Q3 results even in riskier segments. We believe that valuations have largely priced in all these concerns. Also, the lack of any negatives from the Budget was a positive for the insurance sector especially as valuations are at multi-year lows and we expect gradual growth recovery. For Oil & Gas sector, stable crude is a positive and valuations have now turned into a value zone; however, the sector is lacking any positive triggers on the policy front and/or earnings growth at the moment.
Is this the right moment to enter the market and ride the recovery wave?
The market has become much more balanced now. It was extremely thematic until the second half of 2024, leading to valuation excess in themes like Manufacturing, Defence, Capital Goods, Power and Real Estate. Since then, valuation in certain stocks has started looking reasonable again after the correction. Meanwhile, some of the laggard large cap sectors like Banking and Consumer have relatively lower valuations with potential for fundamental outlook improvement post the Budget as well as RBI’s recent monetary policy. To manage the changed macros and the shift in the nature of markets away from thematics towards bottom-up, investors may focus mainly on the core diversified categories (Large Cap, Large and Mid, Flexi Cap).
In the long-term, the domestic healthcare sector appears promising given the structural demand-supply gap for quality healthcare in India, rising affordability and insurance penetration.
Which sectors do you believe offer opportunities for alpha generation? Are there any sectors facing structural challenges that should be avoided for the time being?
As mentioned earlier, banks are trading at reasonable valuations and are at an inflection point in earnings growth (after two lacklustre years) led by credit growth, stable to slightly lower NIMs and moderate credit costs. The relative growth differential versus the rest of the market is also likely to reduce, which can lead to re-rating. In the long-term, the domestic healthcare sector appears promising given the structural demand-supply gap for quality healthcare in India, rising affordability and insurance penetration.
When do you see FIIs making a comeback? What could prompt them to start buying Indian equities again?
FIIs would likely follow the trade-off between dollar strength, India’s valuation premium and the earnings growth delivery. While India’s macros are supportive, the micro-level data in terms of corporate earnings growth has not been supportive for the last 3-6 months. In that context, recovery in GDP growth starting in FY26 and moderation of earnings downgrades will be key factors driving FPI flows.