Daily Voice: Market underperformance could reverse, likely to reclaim record high on earnings recovery hope, says this investment professional

Sandeep Neema is the Director at PL Asset Management

The markets underperformed other emerging markets by a wide margin year-to-date and in past 12 months. "This could change now," said Sandeep Neema, director at PL Asset Management in an interview to Moneycontrol.

He expects the markets to reclaim its record highs in 2025 driven by earnings recovery in 2H FY26 and into FY27.

After 50% tariff on Indian goods, Sandeep ruled out the possibility of significantly aggressive stance by the US administration from here on. “Our best-case expectation is that there would be a diplomatic solution found between the two countries which could de-escalate the tariff war,” he said.

The government is focusing on reducing consumer prices through GST reforms. Do you expect companies to pass on these benefits to consumers, or are they more likely to retain them to boost profitability?

The 12% and 28% slab rates are expected to be reduced to 5% and 18% respectively for most of the items. These two account for around 16% of total GST collections while 18% slab accounts for the bulk, two-thirds of total. To that extent, the rate reduction for these products would lower their prices.

We expect most of the companies to pass on the benefits to consumers, while retaining some benefits to the extent of the cost increases that these products have seen due to higher raw material prices.

What is your reaction to the Trump administration's move to impose an additional 25% tariff due to India’s continued imports of Russian oil?

The additional tariffs are negative for key exporting sectors like textiles, gems, jewellery, engineering and chemicals. These sectors account for 60% of total exports to US. Higher tariffs will make Indian products uncompetitive vs other countries' exports. However, in niche products where substitution is not easy, Indian exporters will still be able to export albeit at some margin erosion.

Nevertheless, tariffs will be negative for most of the exporters and impact would range from employment loss, lower production, higher inventories. Overall, the maximum impact of tariffs could be in the form of lower GDP by 0.2-0.4%.

Given Trump’s recent 50% tariff move, what is the likelihood of the market reclaiming its record high levels within the current calendar year?

Indian markets have been flat with no growth in the past 12 months. In YTD terms too, the markets have underperformed other emerging markets by a wide margin. We think this could change now and we expect markets to reclaim its past highs in 2025 driven by earnings recovery in 2H FY26 and into FY27.

What is the probability of Trump adopting an even more aggressive stance on tariffs going forward?

While it's difficult to take a call on how the tariff situation would be in future, we attach a lower probability to significantly aggressive stance from the US administration than the current scenario. Our best-case expectation is that there would be a diplomatic solution found between the two countries which could de-escalate the tariff war.

Do you still expect earnings growth of 9–10% for FY26, despite a potentially strong recovery in the second half of the fiscal year?

Yes. The multiple reforms initiated over the past few months in the form of IT relief, RBI rate cuts, the proposed GST slab rationalisation could all push the economic growth higher in 2H of FY26. We think the earnings downgrade cycle has bottomed out. On the back of economic growth momentum picking up now, we expect higher earnings growth in the second half which would take earnings growth into double digit range for FY26.

Are you currently bullish on the domestic healthcare sector?

Healthcare is a structural positive story in India, given growing needs of the population. The sector has seen many new listings over the past 2 years, giving investors a wide range of stocks to choose from.

However, current valuations, especially in the Hospital sector, appear to be stretched as stock prices have had a good run YTD (year-to-date). Many stocks quote at over 50x their FY27 earnings, we would wait for some correction in these valuations before buying into them.

Are you viewing IT and consumption as potential contrarian bets for the coming years?

IT sector has been facing headwinds from demand front resulting in lower revenue growth and pressure on margins. While valuations look attractive vs the history, the earnings growth has also been much lower than historical growth. So this justifies lower valuations. Unless we see some green shoots for the sector, IT may not yet be a contrarian bet.

Consumption is one of the key drivers of India’s economy; however, urban consumption growth has been poor. Given the slew of reforms and the rate cuts, expect this sector to recover gradually. One can look at stocks which quote at attractive valuations in the sector as a contra bet.