According to Alok Agarwal of Alchemy Capital Management, the challenges for the IT sector are at multiple levels. "The threat from AI is real, and that is likely to impact growth and margins. Tariffs may trigger a US recession, where even the volumes could suffer for IT," he said in an interview with Moneycontrol.
He believes the next 5-10 years look more challenging for the IT sector than the last 5-10 years. "Even in the last 5-10 years, sector earnings growth barely touched double digits," said the Head-Quant & Fund Manager at Alchemy Capital Management.
Among sectors, Alchemy is avoiding export-heavy sectors like textiles, autos, IT, and pharma, which are vulnerable to tariffs. However, he said domestic consumption stories, like telecom, also hold potential.
Do you see the possibility of the RBI revising its growth forecast further downward if high tariff rates persist for an extended period?
Persistent high tariff rates, such as the US’s 26% levy on Indian exports effective April 2, 2025, with a 90-day pause period starting April 09, 2025, threaten India’s growth, along with global growth. The RBI recently revised its FY26 GDP forecast from 6.7% to 6.5%, citing trade uncertainties. UBS and HSBC estimate a 20-50 basis points hit to growth, with Goldman Sachs projecting 6.1%.
Export sectors like gems and jewellery ($9.9 billion to the US in FY24 - source: NIRYAT) face demand risks, though services exports remain resilient. India’s trade surplus with the US ($36 billion in FY24, source - Yes Securities, Alchemy Capital) could narrow, dampening investment sentiment. The RBI’s April 2025 repo rate cut to 6% reflects a pro-growth stance, but prolonged tariffs could force a further downgrade—potentially to 6.2%-6.3%—if global slowdown intensifies or domestic consumption falters.
Rural demand, buoyed by a normal monsoon forecast, and infrastructure capex offer buffers, but external shocks remain a concern. The RBI Governor Sanjay Malhotra emphasised growth over inflation risks, suggesting the RBI’s readiness to act if tariffs persist. RBI has been quite proactive, especially in the last few months - we have already seen a slew of measures including a double repo rate cut, cash reserve ratio cut, and turning deficit liquidity to surplus.
What is more likely — will China announce additional countermeasures, seek a better trade deal with the US in the coming weeks, or resort to selling US Treasuries as a last measure?
China, facing 145% US tariffs since April 02, 2025, has already imposed 125% duties on US goods, signalling a retaliatory stance. Recent reports indicate China filed a WTO (World Trade Organisation) lawsuit and may escalate with targeted countermeasures, such as curbing US agricultural imports or tightening tech restrictions, to pressurise Washington without destabilising markets. A trade deal within weeks seems unlikely; JP Morgan notes entrenched positions, with China’s 2025 growth cut to 4.4% due to trade tensions.
Selling US Treasuries ($800 billion held as of March 2025) is a last resort—Bloomberg warns it could spike global yields, hurting China’s economy more than the US’s. Countermeasures are most likely short-term, leveraging China’s domestic market strength and Asian trade ties to offset US losses. A deal might emerge in mid-2025 if tariff costs mount, but China’s focus now is resilience, not capitulation. India could benefit from supply chain shifts, with chemicals and textiles gaining if China’s exports falter.
Do you believe that US inflation will rise and China will lose access to its biggest market (the US) if high tariff rates persist for a long period?
High US tariffs will likely drive inflation. JP Morgan estimates a 1%-1.5% rise in US PCE (Personal Consumption Expenditures) prices by mid-2025, with core inflation hitting 3.1%. Tariffs disrupt ~$400 billion in US imports, raising costs for consumers—evident in the ISM (Institute for Supply Management) manufacturing index drop to 49.0 in March 2025. China’s US exports ($500 billion in 2023) won’t vanish but could shrink 20-30% for tariffed goods like electronics, per Reuters. China is redirecting trade to ASEAN and Europe, with India potentially capturing chemical exports ($28 billion to the US in 2023, source: Trade Statistics, GOI).
Complete market loss is improbable—China’s supply chain dominance persists. US recession risks (Goldman Sachs: 45% chance) could temper inflation but hurt global demand, impacting India’s IT, auto and pharma exports. India’s CPI (Consumer Price Index) inflation for March 2025 came in at 3.34%—the lowest reading in 67 months. In our view, this places India in a relatively better position.
Which sectors appear more attractive for investment in the current uncertain environment?
Amid tariff-induced volatility, defensive sectors are appealing - domestic-facing sectors with reasonable visibility of growth, not much leverage and a reasonable cash flow generation track record. FMCG benefits from rural demand revival, but valuations are too high for the corresponding growth. Hotels, hospitals, electronic manufacturing, cement, defence, power, chemicals, and financial services look stronger.
RBI’s rate cut to 6% in April 2025 supports rate-sensitive sectors like real estate, with PropEquity noting rising housing demand and inventory levels falling back to multi-year lows. We are avoiding export-heavy sectors like textiles, autos, IT, and pharma, which are vulnerable to tariffs. Domestic consumption stories, like telecom, also hold potential.
Do you foresee better days ahead for the chemical sector?
India’s chemical sector faces near-term challenges but has long-term potential. US tariffs on China ($28 billion chemical imports) could reroute orders to India. However, HSBC notes tariff-related demand risks, with the global slowdown hitting commodity chemicals. Speciality chemicals showing resilience due to niche applications. If tariffs persist, we assume India could gain market share by 2026, but 2025 may see margin pressure for smaller firms. Selective investment in companies with strong domestic moats or the US client diversification is prudent.
Are you highly bullish on FMCG and bearish on the IT sector?
FMCG valuations of over 40x for single-digit earnings growth appear to be quite high, in our view. However, rural demand recovery (5% growth in Q4 2024 per NielsenIQ) and easing CPI inflation (3.34% in March 2025) favour such companies. RBI’s accommodative stance supports consumption, especially festive demand.
IT - the challenges are at multiple levels. The threat from AI is real, and that is likely to impact growth and margins. Tariffs may trigger a US recession, where even the volumes could suffer for IT. We believe the next 5-10 years look more challenging than the last 5-10 years. Even in the last 5-10 years, sector earnings growth barely touched double digits. While the outlook is not exactly exciting, the recent sharp correction does leave room for pullbacks. US tariffs and recession fears (Goldman Sachs: 45% chance) threaten budgets.
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.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
Find the best of Al News in one place, specially curated for you every weekend.
Stay on top of the latest tech trends and biggest startup news.
