Daily Voice: Expect cut in FY25 earnings estimates; markets may eye FY26 outlook, says this portfolio manager

The results so far have been underwhelming, even on relatively modest expectations. This has been primarily due to muted demand across many sectors. However, there is likely to be a sequential improvement in subsequent quarters on the back of good monsoons supporting rural revival, pick-up in government ordering and spending which is currently lagging the budgeted run-rate, and likely acceleration in exports, among other drivers. While there may be a cut to FY25 estimates, the markets will likely be more focused on FY26 numbers wherein the effect may be milder.

Do you believe the small-cap and mid-cap segments will remain expensive going forward, despite intermittent corrections?

The small-cap and mid-cap basket has a very diverse set of businesses. Many of the sectors within them have undergone structural changes over the last few years that have either led to strong earnings improvement or greater visibility of long-term growth prospects. So, wherever fundamentals are supportive, valuations could remain elevated. Where earnings delivery is below expectations and stocks are more hopeful or liquidity-driven, the markets are likely to be more punishing and they could also take longer to recover.

Will the Indian IPO market become the largest in the coming years, and will many multinational companies have listed entities in India?

The US, China/Hong Kong and Japan are amongst the largest IPO markets. In recent years, India has emerged as one of the larger IPO markets, with its share of global IPO deal value at about 10 per cent being more than double its share of global market capitalization. This trend is likely to accelerate supported by our economic growth, broadening of economic opportunities and buoyancy in markets. Yes, many MNCs might want to benefit from the higher multiples that Indian markets offer and list their subsidiaries here.

Is it time to bet on the metals sector?

Volume growth in India is likely to remain strong on the back of higher spending on infrastructure, rising construction activity and an increase in manufacturing. Hence, most large Indian companies in the metals space are expanding capacity. Pricing is primarily driven by China which is about half the global consumption and production. As the Chinese real estate sector remains in a downward spiral, we remain wary. Though sentiments have been buoyed by recent policy measures in China, we suspect that continued and comprehensive support may be required. Any tariff or non-tariff measures in India that could protect from imports, or a weakening of the dollar could be positive for the sector though.

Will the Fed's rate cut cycle be shallower than expected if the US economy remains strong?

The markets are expecting another 50bps of reduction and a US Fed Funds rate of 4.5 percent by end of 2024. If the US economic growth remains resilient, then rate cuts are likely to add upside risks to inflation. Rather than risking its credibility, the Fed could calibrate its approach in such a scenario by spreading out the cuts over a longer duration.

Are you betting on the consumption sector?

Yes, we have significant exposure to the consumption space, both in staples and discretionary. While the staples basket has more sedate growth, our approach is to invest in businesses that can do significantly better by expanding product suites, distribution reach or by entering new geographies. We have a higher allocation to discretionary, a play on rising incomes and aspirations, where we like multiple segments like travel, home improvement and retail.

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