Daily Voice: 5 sectors poised to boost FY26 earnings growth, according to this portfolio manager

Inbound FII flows, low inflation numbers, interest rate cuts, and a good monsoon are some of the positives that could help sustain the rally in the coming months. We expect the GDP growth outlook to improve in FY26, driven by higher consumption resulting from tax and interest rate cuts. Government capex and global supply chain reorientations, triggered by trade tensions, are also expected to boost domestic manufacturing and exports.

Do you see any risks that could dampen market sentiment in the coming quarters?

On the negative side, geopolitical tensions, Trump’s tariff policies, or a spike in inflation could have a negative impact on the markets. While FIIs have remained net buyers over the past three months (from March to May 2025), US economy-specific factors could reverse this trend. High valuations in certain segments, if not supported by earnings growth, might trigger a reshuffling of assets across sectors or asset classes.

Do you expect the RBI to cut the repo rate in the June meeting, along with a change in growth and inflation forecasts for FY26?

Growth and inflation forecasts for FY26 are unlikely to change. However, it is almost certain that there will be a 25 bps rate cut in the June meeting, as the inflation has consistently remained below the RBI’s target 4 percent. This will be the third rate cut of the year and is expected to be followed by another cut in August. The total 100 bps rate cut in 2025, along with the impact of tax reductions, is anticipated to boost demand and further support the capex cycle this year.

After reviewing March quarter earnings, which sectors are likely to contribute significantly to FY26 earnings?

Banking and financial services, defence, capital goods, power, and EPC sectors are poised to boost FY26 earnings. We expect capital investment in infrastructure to regain momentum. The defence sector is likely to see a significant focus on order book execution post-Operation Sindoor, boosting topline growth for the defence companies. Power, EPC, and select infrastructure companies could see strong growth as the focus shifts back to execution.

Have you started adding exposure to the consumption space?

Our exposure to the consumption space is primarily through banks and specific financial services companies, such as housing finance firms. We continue to avoid FMCG and consumer durables due to either growth concerns or extreme overvaluation.

Are you still concerned about the tariff factor?

While several bilateral trade agreements have been signed by the US following the 'Liberation Day' tariff announcements and the subsequent pause, the 90-day pause is set to expire in July and may trigger fresh uncertainties.

Is this the best time to invest in the banking sector, and why?

Buffett says that in investing, pessimism is your friend and euphoria is the enemy—and we believe in the same philosophy. There is excessive pessimism regarding issues such as NIM (net interest margin) compression and the MFI (microfinance institutions) loan book for most banks. With limited impact on the long-term value of banks, we believe this pessimism has created significant mispricing, as reflected in the single-digit (7.3x) price-to-earnings ratio for the PSB index.

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