Anil Rego, founder and fund manager at Right Horizons PMS, believes the current market correction appears to be driven more by global macro uncertainties and the delay in the India–US trade deal, rather than by June quarter earnings.
He sees capital goods as a potential proxy play for the recovery in the economy. "With robust government spending on railways, roads, and energy, alongside early signs of private sector capex revival, capital goods companies are witnessing strong order inflows and improved execution visibility," he said.
On the upcoming FOMC meet outcome, he believes the Federal Reserve’s cautious policy stance points towards unlikely rate cuts in July 2025. "Market expectations have shifted toward the possibility of a rate cut in the last quarter of 2025," he said in an interview to Moneycontrol.
Is the market reacting more to the June quarter earnings performance, or to the delay in the India-US trade deal?
The market correction appears to be driven more by global macro uncertainties and the delay in the India–US trade deal, rather than by June quarter earnings.
While Q1FY26 earnings have been mixed with some sectors like IT, auto, and private banks delivering steady results. The broader market pressure stems from the geopolitical and policy overhang.
Specifically, the lack of clarity on the India–US trade agreement and fears of potential tariff imposition under a possible second Trump presidency have heightened concerns for export-dependent sectors like chemicals, metals, and pharma. This uncertainty is further amplified by continued FII outflows, driven by rising US bond yields, a stronger dollar, and India’s relatively rich valuations.
Earnings season alone hasn’t triggered a sell-off, markets have seen healthy results in pockets but the global risk-off sentiment and trade-related anxiety are clearly overpowering domestic fundamental cues in the near term.
Do you believe the next driver of growth could be a recovery in consumption?
A gradual consumption recovery led by rural demand, margin normalization, and policy support rate cuts is likely to become the next growth driver in India. While the rebound is not broad-based yet, the underlying setup is turning favourable for a more sustained revival over FY26.
There are early signs of rural recovery, aided by normal monsoon prospects, early sowing, and stable food inflation. This is driving optimism for mass-market FMCG categories and value-focused durables, particularly in agri-linked and Tier 2–3 markets.
Premium discretionary segments like QSRs (quick service restaurants), footwear, and lifestyle retail remain soft, hotels, value fashion, and jewellery are sustaining momentum, driven by domestic travel and festive/wedding demand. The urban slowdown in staples, due to low wage growth and high rentals, remains a short-term overhang. Correction in commodities like palm oil, tea, and coffee is beginning to reflect in gross margins, which could support profitability in H2FY26.
Do you expect the correction in the technology sector to continue, given that earnings have failed to revive investor sentiment? Also, do you believe double-digit growth in the sector is unlikely till 2026?
The correction in the IT sector is likely to persist in the near term, as Q1FY26 earnings have largely underwhelmed investor expectations, and commentary across most large and mid-tier firms remains cautiously subdued. Despite stable deal pipelines and resilient client budgets in select verticals like healthcare and energy, the pace of decision-making remains slow especially in the BFSI and tech verticals leading to continued revenue pressure.
Are you observing signs of a cyclical recovery in the domestic economy?
The data points to a recovery, anchored by strong corporate profitability, easing inflation, margin resilience, rural tailwinds, and early signs of consumption revival. While global risks remain a concern, the domestic growth engine is reactivating, and India is well-positioned to outperform through FY26.
India Inc.’s profit growth (FY20–25 CAGR: 30.3%) has outpaced GDP growth (10.5%) nearly 3x, driven by formalization, lower debt costs, and strong mid- and small-cap performance. Profit-to-GDP ratio has reached a 17-year high of 6.9%, with further room to grow compared to developed markets like the U.S. (16%).
Private Banks, NBFCs, consumer durables, capital goods, and healthcare led the earnings recovery in FY25 with double-digit revenue and EBITDA growth, well above the Nifty 500 average. Mid and small caps have shown stronger PAT growth than large caps, indicating a broadening recovery and rising economic confidence.
FY26 growth will likely be fueled by rebound in government capex and rural consumption both critical levers in a cyclical upturn. Early monsoon progress, improving rural sentiment, and base effect are expected to support a pickup in mass consumption through FY26. Despite global volatility, India remains attractive due to macro stability, stock-level opportunities, and earnings resilience. India’s elevated valuations are justified by stronger fundamentals, and current volatility offers long-term investment opportunities.
Which sector do you see as a potential proxy play for the recovery in the economy?
The capital goods sector reflects the combined momentum of rising infrastructure investment, manufacturing capex, and industrial activity. With robust government spending on railways, roads, and energy, alongside early signs of private sector capex revival, capital goods companies are witnessing strong order inflows and improved execution visibility.
The sector posted 21% YoY revenue growth and 34% PAT growth in FY25 among the highest across industries indicating a broad-based industrial recovery. Additionally, this sector is strategically positioned at the intersection of key structural themes such as PLI-led manufacturing, energy transition, and defence modernization.
Given the recent economic data, do you rule out the possibility of Fed funds rate cuts in the July and September meetings? If so, does that imply a rate cut is more likely in the last quarter of 2025?
The Federal Reserve’s cautious policy stance, points towards unlikely rate cuts in July 2025. While inflation has moderated somewhat, it still remains above the Fed’s 2% target, and the labour market continues to exhibit strength with low unemployment and steady wage growth. These factors reduce the urgency for any immediate easing.
Moreover, Fed officials, have consistently reiterated a data-dependent approach, emphasizing the need for greater confidence in sustained disinflation before initiating rate cuts. As a result, market expectations have shifted toward the possibility of a rate cut in the last quarter of 2025. This timing aligns with forecasts that anticipate further cooling in inflation and a gradual moderation in economic activity.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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