Daily Voice: Ashwini Shami of OmniScience says this sector is severely mispriced, offers strong investment opportunity

In principle, bigger banks can reduce the fixed corporate-level costs and thus make banking more efficient. However, smaller banks provide financial access to several segments that might not be attractive to bigger banks. Thus, the smaller banks are important for the economy. Yes, they have a lesser ability to absorb shocks and manage mistakes.

But, a good manager who understands the critical issues in the banking business model can run a small bank successfully and thus not only generate good returns for shareholders but also add value to the overall economic growth of the country.

In our opinion, the badly managed banks should be consolidated into the bigger ones, but through formal or informal nudges, the RBI can encourage well-managed smaller banks and this would make the economy more dynamic like having venture capital funds and angel investor does by providing capital to relatively smaller entrepreneurs as well as to other segments who can use capital efficiently.

Do you strongly believe that public sector bank balance sheets are now stronger than those of private sector banks?

We can definitely say that the PSU Banks' balance sheets are the strongest in the last 10 years or more, probably since the Global Financial Crisis. In the Private Sector Banks, we would say that one has to be selective. Lots of banks have some issues in different parts of the balance sheet or the loan book. However, even the private sector banks have strong balance sheets overall.

The parts with problems are not overwhelming their business model and at the present valuations, while the PSU Banks are extremely attractive in our view, even the private banks are very attractive. In fact, this is one of the few major sectors that we find severely mispriced and provides an attractive investment opportunity. We have been overweight in this sector for our own and the client's book.

Do you expect the earnings downgrade cycle to end only in the second half of FY26, rather than by the end of the first half? Which sectors are most likely to see earnings downgrades?

As we are progressing through the year, it does appear that high earnings growth might take some more time. IT, metals and mining, chemicals and oil & gas are sectors with less predictability since they depend on the global economic situation and the value of the Rupee.

Similarly, the Pharma sector is also significantly exposed to the global markets, and the possibility of Trump Tariffs and their impact is also unpredictable.

Do you anticipate a rebound in IT earnings in the next calendar year?

IT earnings growth happening in 2026 would require more optimism than the current information suggests. For this to happen, the US economic situation has to be quite strong and stable. While we think the US economy is strong, the stability in terms of inflation, value of the USD, debt situation, fiscal deficit, and potential issues in the supply chain due to tariffs is what makes it less likely that the IT sector would start seeing large discretionary allocations in 2026.

The large budgets for capitalizing on the AI opportunity for the Fortune 500 would happen once these companies see stability and growth. 2027 is more likely when things might be more stable, and thus, Indian IT companies might see higher demand from the Fortune 500 for AI-related projects thus driving earnings growth.

Have you increased your portfolio allocation to the chemicals sector?

No, we are not allocating to the chemical sector yet. Chemicals will come on our radar only when their valuations are more realistic.

Do you expect the Trump–Powell tussle to persist for a prolonged period? Also, do you anticipate the next Fed funds rate cut to happen in September rather than July? Lastly, do you expect a significant hike in tariff rates after the August 1 deadline?

The Trump-Powell tussle is likely to last as long as Powell’s term. The latest CPI data was again higher than the consensus expectations, thus reducing the Fed’s likelihood and flexibility in cutting interest rates. July looks unlikely at this point. September rate cut could happen, but the inflation numbers and the impact of tariffs and deals on the supply chain will be watched very carefully by the Fed before cutting rates, even then.

Yes, tariffs would likely be hiked further for the countries that do not show interest in a deal.

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