Daily Voice: Market likely to see further 5-7% correction until Union Budget, says Green Portfolio's Divam Sharma

Divam Sharma is the co-founder of Green Portfolio

"In the next three weeks, we have material events including the Union Budget announcement - until then, we are likely to see 5-7% correction in the markets," Divam Sharma, the co-founder of Green Portfolio said in an interview to Moneycontrol.

According to him, a weak Budget parallel to the 2024 August budget could shock the markets. "No mention of railways, infra, and defence will result in valuations of these sectors dropping to 30-40x levels," said Divam.

With more than 15 years of experience in investment management, he believes telecommunications, pharmaceuticals, automotive, and packaging are the four key sectors to focus on as an investor, each offering growth potential driven by innovation, rising incomes, and shifting consumer preferences.

Which sectors have you identified for portfolio inclusion following the recent bearish sentiment?

As we approach 2025, the path to smart investment may seem challenging but focusing on key sectors can get you ready to beat market volatility, shifting government policies, and rapid technological advancements. The recent correction in the markets have made valuations favourable.

India's telecom sector, the fourth-largest FDI recipient, employs 4 million people. Innovations in 5G, AI, and edge computing are revolutionising industries, with 6G poised to enhance industrial applications by 2030. The pharmaceutical sector grew by 8% in 2024 to Rs 2.20 lakh crore and is projected to grow even further in 2025. Dollar revenues benefit exporters but face challenges from global tightening. Companies investing in R&D for oncology and other high-growth areas are expected to outperform.

The automotive industry thrives on festive demand. Premium SUVs, and luxury cars, reflect aspirational consumer trends. Packaging and consumer staples see steady growth, driven by rising incomes, organised retail, and branded product preferences. Overall, these are the four key sectors to focus on as an investor: telecommunications, pharmaceuticals, automotive, and packaging, each offering growth potential driven by innovation, rising incomes, and shifting consumer preferences.

We also feel export-oriented sectors are going to do much better due to weakening Rupee and strengthening dollar. IT has remained one of the most liked sectors by FIIs and the sectors remain in a positive zone due to expected rate cuts in 2025. Q1 and Q2 had shown a muted performance and we do worry if Q3 would mark a hat-trick.

Do you think the worst is still ahead for the equity market, or is it close to bottoming out?

Yes, this downward pressure should continue as the market currently has no direction. The weakness in preliminary banking stats, sanctions on Russian oil by the US, uncertainty of Trump's attitude towards India are short-term negative sentiments driving the market. Clarity on Trump's tariffs on China and approach towards Indian exporters once the office is taken will provide a state of certainty to the markets.

In the next three weeks, we have material events including the Union Budget announcement - until then, we are likely to see 5-7% correction in the markets. A weak Budget parallel to the 2024 July budget could shock the markets. No mention of railways, infra, and defence will result in valuations of these sectors dropping to 30-40x levels.

Do you truly believe the Union Budget is likely to significantly impact the market's direction?

Yes, we do believe that the Union Budget will have not only significant but a long lasting impact on the market’s direction. Many factors have been working against India and not only on the macroeconomic front, but micro too. India has been facing what experts are referring to as consumption tilt. Consumer staple companies have reported a below average volume growth and we expect FMCG companies to be disappointing for the third straight quarter.

1. Capex Outlook: A budget allocation exceeding Rs 2.95 trillion would signal a more aggressive stance, marking a notable increase from the Rs 2.72 trillion allocated in FY23. With rising debt-to-GDP ratios and growing interest costs, combined with sluggish GDP growth, the government is likely to focus more on Build-Operate-Transfer (BOT) and Hybrid Annuity Model (HAM) projects, as these require a significantly lower capital expenditure outlay compared to traditional Engineering, Procurement, and Construction (EPC) projects.

2. Real Estate Sector: The market would likely welcome any measures aimed at streamlining regulatory approvals for real estate developers. According to a major listed developer, the approval process can take up to five years and incur costs upwards of Rs 50 crore. This lengthy delay forces developers to tie up substantial portions of their working capital for extended periods, hindering growth. The implementation of a single-window clearance system could provide a much-needed catalyst for the sector's expansion.

3. Seafood Industry: The seafood sector, especially shrimp producers, has been facing increasing competition from international markets. Introducing temporary tax relief and subsidies for these companies could help alleviate the pressures they are facing and provide a boost to the industry, helping it recover from current challenges.

Do you think the rate cut cycle in India is now likely to be postponed to the second half of 2025?

Everyone has been waiting a long time for the interest rate cut cycle to begin but Fed’s hawkish stance has just aggravated the uncertainty around this. We expect a 100 bps cut in 2025 but if the economic slowdown continues, we could see a cut sooner than later. Seeing the consumption patterns and geopolitical conditions, a rate cut can induce consumers to go and fuel demand. This would also have a domino effect on the manufacturing sector and in turn the employment.

Do you anticipate further slowdown in the economy?

The government is yet to release the Q3 GDP numbers and markets are anticipating it to be around 6.8%. The manufacturing activity is going through gloomy days and that is the reason we witnessed a plunge in the Q2 GDP numbers. As mentioned before consumer spending is also sputtering and retail defaults are on a rise. All eyes are on the budget and if the government fails to give any relief to the middle income class group, it would not be applauded by markets.

FIIs have been pulling out the funds consistently and investing in the better valued markets. The main reason for this is the narrowing yield between India and the US. Trump will officially resume the office on 20th January and we do not see anything favourable coming out of it, especially after his eye on Canada and Greenland. Rising cases of HMPV virus are another roadblock in India’s path to economic recovery. Keeping all of it aside, we look at the silver lining of the correct valuations now. This fall has opened gates to many opportunities which we might have been avoiding earlier.

Will the consumption sector's slowdown witness a sharp reversal in the second half of 2025?

As I said before, India is facing a subpar consumption trend, especially the rural consumption. It has been witnessing a slow down. At the same time household debt is skyrocketing like anything. From Rs 77 lakh crore in 2021, which was Covid’s peak, to Rs 120 lakh crore in 2024, it stands at 43% of GDP. Inflation has cooled down but it is still high. Any increase in interest rates or any diversion from the planned rate cut can trigger a series of defaults. Uncertainty of the geopolitical conditions remains a worry. We do not see the trend seeing a reversal anytime soon.