Daily Voice: Don't see earnings downgrades risk for these 4 sectors, says Invasset PMS' Anirudh Garg

Anirudh Garg is the Partner and Fund Manager at Invasset PMS

"We do not anticipate major earnings downgrades in our focus areas — Pharma CDMO/CMO, Banking and Financial Services, and select consumption and manufacturing pockets — which have shown stable to improving earnings even amid broader macro challenges," Anirudh Garg, Partner and Fund Manager at Invasset PMS said in an interview with Moneycontrol.

According to him, earnings downgrade risks persist in sectors like IT services, parts of discretionary consumption, and select global cyclicals vulnerable to trade tensions and softer global demand.

Still, he believes India’s earnings cycle remains resilient compared to global peers, supported by domestic consumption, government capex, and manufacturing tailwinds. Tactical downgrades may emerge, but the structural story is intact, he said.

At this stage, it appears unlikely that the US Federal Reserve will lower its 2025 growth forecast at the May policy meeting. In March, the Fed had already cut its real GDP estimate from 2.1 percent to 1.7 percent, factoring in the drag from tariffs and weaker consumer and business sentiment. Inflation expectations were also raised to 2.8 percent, signaling more persistent price pressures. While growth risks remain, particularly from tighter financial conditions and geopolitical uncertainties, the Fed’s guidance still points to gradual normalization.

Current projections already reflect a slowdown, and unless new data deviates sharply, another downgrade seems unnecessary. Moreover, the May meeting lacks a Summary of Economic Projections (SEP), the usual platform for forecast changes. Without a major economic shock or sharp shifts in indicators, the Fed is expected to stick to its March view. For markets, this continuity supports a data-driven but cautious policy path for US growth and rates.

There is a credible risk that China’s GDP growth could fall below 4 percent this year, driven by rising external tariffs and domestic challenges. The sharp increase in US tariffs — some reaching 145 percent — threatens China’s exports just as the economy faces weak demand and a stressed property sector. While first-quarter growth hit 5.4 percent, much of it was front-loaded by pre-tariff shipments, making second-half momentum doubtful.

Institutions like UBS and the IMF have revised forecasts to 3.4–4.0 percent, depending on export impact and stimulus effectiveness. Beyond trade, deflation, youth unemployment, and weak private sector confidence also weigh on recovery. Although more fiscal and monetary support is expected, the combination of external shocks and structural issues will make sustaining high growth difficult. Globally, softer Chinese growth would affect commodity demand, supply chains, and regional economies. Unless trade tensions ease or consumption rebounds sharply, a sub-4 percent growth outcome for China in 2025 is now a real possibility.

The ongoing earnings season in India shows clear sectoral divergence. Pharmaceuticals, especially the CDMO/CMO segment, have posted strong numbers, driven by rising US and European outsourcing demand and weaker Chinese competition. Several mid-sized CDMO players reported record quarterly revenues, aligning with our significant portfolio allocation to this space.

In contrast, Information Technology has been sluggish. While large-cap IT firms met muted expectations, management commentaries were cautious, citing longer decision cycles, weak US discretionary spends, rupee appreciation, and global macro uncertainties like tariff wars. FY26 revenue guidance indicates low single-digit growth, making IT less attractive near term.

Banking and Financial Services remain strong, with private banks reporting healthy loan growth, stable asset quality, and robust net interest margins. Capital goods and manufacturing sectors show upbeat commentary with strong order books. Overall, the polarized earnings season reinforces the need for selective investing in structural growth areas rather than broad-based exposure.

At INVasset PMS, our philosophy is anchored on identifying sectors and companies undergoing positive relative changes. Accordingly, we do not anticipate major earnings downgrades in our focus areas — Pharma CDMO/CMO, Banking and Financial Services, and select consumption and manufacturing pockets, which have shown stable to improving earnings even amid broader macro challenges.

However, earnings downgrade risks persist in sectors like IT services, parts of discretionary consumption, and select global cyclicals vulnerable to trade tensions and softer global demand. While the market has partially priced in these risks, seen in mid-tier IT underperformance, volatility could rise if earnings disappointments worsen.

Still, India’s earnings cycle remains resilient compared to global peers, supported by domestic consumption, government capex, and manufacturing tailwinds. Tactical downgrades may emerge, but the structural story is intact. We remain focused on overweighting sectors with improving earnings visibility and avoiding areas where expectations are misaligned with ground realities.

We believe the market may experience intermittent volatility after the recent sharp rally. However, rather than signalling a near-term swing top, we see this as the early phase of a broader structural uptrend. A significant bottom was formed earlier this year when valuations corrected sharply in mid and small-caps, creating an attractive risk-reward setup. While short-term consolidation is possible due to global macro uncertainties, the medium- to long-term outlook for Indian equities remains strong.

Resilient domestic demand, rising manufacturing investments, strong credit growth, and China+1 shifts support sustained momentum. We believe earnings growth for quality companies remains intact, enabling meaningful alpha generation over the next 24 months. While the market may not move linearly, brief consolidations are healthy within a new bull cycle. Our portfolio is positioned to capture this optimism, focused on sectors benefiting from relative earnings upgrades and structural tailwinds.

While valuations in the Indian IT sector have moderated after the recent correction, we believe the sector still lacks a compelling risk-reward profile compared to emerging opportunities. Management commentaries across large and mid-sized IT firms remain cautious, citing weak discretionary spending, delayed decision-making in the US, and global macro uncertainties. Although some frontline IT companies now trade near long-term average multiples, muted growth and margin pressures weigh heavily.

In contrast, sectors like pharmaceuticals, banking and financial services, capital goods, and manufacturing offer stronger upside potential. We allocate capital where earnings visibility, structural tailwinds, and valuation comfort align best. While IT is no longer "expensive," the opportunity cost of staying in slow-growth sectors remains high. Our focus remains on sectors showing positive relative changes.