However, stricter visa rules will not pose much of a threat to Indian IT majors, he said in an interview. Edited excerpts:
The next two to three weeks will be action-packed for investors due to the ongoing third quarter earnings season, Trump’s swearing-in, the Federal Reserve meeting, and the federal budget back home. What strategy will you use if volatility is likely to be higher than usual?
We will track these events as they relate to long-term trends in the economy and capital markets. Our investment approach is less responsive to news events unless they materially change our view of a company’s business. We continue to favor high-quality companies with sound fundamentals and strong balance sheets. Perhaps such companies will be better positioned to weather the disruption caused by the events mentioned above.
Do you think earnings downgrades will come back to haunt investors during the third quarter earnings season? What are your overall segment expectations for third quarter performance?
The potential for further earnings downgrades is clear, especially in small and mid-cap stocks and areas of the market where valuations are still expanding. Broad third-quarter consensus earnings expectations are relatively better for the telecommunications, real estate and pharmaceuticals sectors. Lenders with exposure to consumer loans may report negligible numbers due to increased regulation of unsecured loans. Consumer discretionary could be a bit of a mixed bag as slower cyclical demand partially offsets festive season spending.
Although the consensus among brokerages appears to be in favor of large-cap stocks, many blue chip stocks have underperformed over the past two to three years. Do you think the valuation of bruised blue chips is attractive enough in 2025?
Nifty50’s forward P/E is within historical averages and reasonable compared to the small and mid-cap space. If you look at a broad range of valuations, you’ll find well-managed companies with solid fundamentals, with plenty of opportunity in large private banks and even life insurance. The Nifty private bank index has lagged the PSU index and the value of most large private banks has declined over the past five years. Basically, big banks don’t have major credit issues and are generally well prepared for any emergency. Most private banks are increasing their market share. At a more fundamental level, the growth of large private banks is linked to GDP growth. So, if the economy is expected to grow at a nominal 10-12% over the next decade, private banks should grow at least at a similar rate. It’s not faster.
Given the Street’s low expectations for the third quarter earnings season, do you think Nifty’s current valuation is reasonable enough to limit a major decline unless triggered by a shocking external event?
At least for Nifty, I don’t think there should be any major downside from current levels. However, some stocks are likely to see larger declines due to lower valuation multiples.
How could the election of President Donald Trump affect the Indian stock market? IT is seen as a winner, but there is a threat of stricter visa rules. Which Indian exporters are likely to be negatively affected by Trump’s rule?
Some of Trump’s campaign signature promises, such as tariffs and immigration controls, if implemented, could put upward pressure on inflation and Treasury yields, impacting capital flows to India. Over the course of the first Trump presidency, many Indian IT companies reduced their dependence on H1B visas by increasing local hiring, expanding offshore shipping centers in Mexico and Canada, and strengthening their overseas presence. Therefore, strengthening visa regulations should not pose a major threat, at least to IT. On the other hand, considering India’s geopolitical position and good relations with the United States, we should not be disadvantaged under the Trump administration. In fact, lower oil prices could be a net positive for us if our stated intention to increase U.S. fossil fuel production is realized.
What are your expectations for the union budget from a capital markets perspective?
With tax collections growing by around 9% YTD and the government committed to reducing the fiscal deficit to around 4.5% of GDP by FY26, it is difficult to expect a significant increase in government capital expenditure in the upcoming budget. There may be additional funding available for PLI schemes, which have become popular in certain industries. There are also cases where some of the tax disadvantages for stocks compared to bonds are corrected. If private investment becomes active, the debt capital market will become an important source of financing for companies.
The facility investment theme has slowed since the results of the National Assembly election were announced in June last year. Will there be any movement in rail, defense and other capex stocks as the budget prepares? Or do you think investors are more likely to be disappointed?
I think there is a high possibility of disappointment due to constraints in government spending. Additionally, the market may be more focused on delivering revenue growth through executing existing projects for these stocks.
Which industries have become more attractive in terms of valuation following the market correction since the peak at the end of September?
Some FMCG and consumer goods stocks, which are affected by continued slowdown in demand or increased competition, look attractive over the long term given the expectation that consumer spending will eventually recover. Our strategy will continue to be stock-specific, focusing on clean, well-managed franchises with earnings visibility and reasonable valuations. While value stocks have performed well, many of these high-quality long-term compounding stocks have underperformed over the past four years. But our investment style remains sector and theme agnostic.
