Daily Voice: Softer tariffs lift earnings outlook; durability the real test, says Right Horizons' Anil Rego

Anil Rego is the Founder and Fund Manager at Right Horizons PMS

• Reduction in tariff intensity directionally positive for export sentiment and earnings visibility
• Do not rule out possibility of meaningful correction in gold from current elevated levels
• Risk-reward appears relatively better in select mid-cap IT names

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For India, the reduction in tariff intensity is directionally positive for export sentiment and earnings visibility, said Anil Rego, Founder and Fund Manager at Right Horizons PMS, in an interview with Moneycontrol.

However, he believes markets will closely track the durability of the framework and the trajectory of bilateral trade discussions before assigning a sustained re-rating to trade-exposed sectors.

Meanwhile, on the sectoral front, he maintains selective exposure to the data centre theme, though not through pure-play operators.

“Our allocation is routed through wires and cables manufacturers, renewable-focused power companies, and a Mumbai-based real estate player benefiting from commercial infrastructure demand,” he said.

He also remains constructive on the lending cycle heading into FY27.

The Supreme Court struck down Trump’s tariffs in Friday's hearing; however, following the verdict, Donald Trump raised global tariffs to 15% from 10%. What does this mean for India, the US, and other countries?

The US Supreme Court’s decision to invalidate the earlier IEEPA-based tariffs has materially altered the trade landscape, prompting a swift policy recalibration from the White House. In response to the ruling, the administration has imposed a fresh 10 percent tariff under Section 122 of the Trade Act of 1974, effective February 24, for a period of up to 150 days. This provision permits temporary duties of up to 15 percent to address serious balance-of-payments concerns.

As a result, India’s effective tariff exposure has been reduced to 10 percent from the earlier 18 percent level. Exemptions remain in place for sectors under separate investigations, including pharmaceuticals, and for goods covered by the US-Mexico-Canada Agreement.

From an investment perspective, while the Supreme Court’s judgment reinforces constitutional limits and reduces the risk of sweeping unilateral tariffs, the invocation of Section 122 underscores that trade policy uncertainty has not fully dissipated. The temporary nature of the measure suggests it may serve as an interim bridge while negotiations evolve.

For India, the reduction in tariff intensity is directionally positive for export sentiment and earnings visibility.

At a sector level, textiles and gems & jewellery stand out as the most direct and near-term gainers from the easing of tariffs. The steep reduction in duties from earlier levels of around 50% to 10%, along with zero-duty access for specific categories such as silk and diamonds, meaningfully enhances cost competitiveness in the sizeable US market. We believe markets will closely track the durability of the framework and the trajectory of bilateral trade discussions before assigning a sustained re-rating to trade-exposed sectors.

Do you rule out a major correction in gold prices from current levels?

We do not rule out the possibility of a meaningful correction in gold from current elevated levels. Gold has seen a strong rally driven by geopolitical tensions, central bank buying, and persistent global uncertainty. However, positioning is crowded, and a shift in US real yields or dollar strength could trigger profit booking.

That said, any correction is likely to be technical rather than structural. With central banks diversifying reserves, ongoing geopolitical fragmentation, and medium-term concerns around fiscal sustainability in developed markets, gold continues to enjoy a supportive macro backdrop. Therefore, while volatility and interim corrections are possible, the longer-term demand drivers remain intact.

Do you think the market reactions to the recent AI developments have been overdone?

Yes, in the near term, market reactions appear somewhat overextended. The AI narrative has driven sharp capital allocation shifts globally, with valuations in select AI-linked and semiconductor names stretching significantly. Markets tend to extrapolate early-stage growth into perpetuity, which creates pockets of excess.

However, this does not negate the long-term transformative potential of AI. What we are witnessing is a classic cycle- initial euphoria, followed by consolidation and rationalisation. Over time, earnings delivery will separate durable franchises from speculative beneficiaries. The current correction or volatility in AI-linked trades should be seen as a normal phase in price discovery rather than a collapse of the theme itself.

Does the long-term risk-reward in Indian IT appear promising?

Indian IT may remain range-bound in the near term as global clients continue to recalibrate discretionary spending amid AI-led cost optimisation and macro caution in the US and Europe. Large-cap IT companies face slower deal conversion cycles and pricing pressure as enterprises prioritise efficiency over expansion.

However, the risk-reward appears relatively better in select mid-cap IT names. Many of them operate in niche verticals, digital transformation, ER&D, and platform-based services, where growth visibility is comparatively stronger. Valuations in this segment have also corrected meaningfully, offering a better margin of safety.

Over the long term, technology disruptions historically expand the total addressable market. Companies that adapt quickly, build AI capabilities, and maintain client stickiness are likely to emerge stronger post-consolidation.

As we approach FY27, are you bullish on the lending business? Have loan and deposit growth begun to show signs of sustainability?

We remain constructive on the lending cycle heading into FY27. Recent data indicating 14% growth in the second fortnight of January suggests that credit momentum remains healthy despite macro volatility. Importantly, deposit mobilisation has also improved, reducing earlier concerns around system liquidity tightness.

Banks and well-run NBFCs are entering this phase with strong balance sheets, benign asset quality, and comfortable capital buffers. Unlike previous cycles driven by leverage excesses, this upcycle is supported by retail demand, MSME growth, and improving corporate capex intentions. The key monitorables will be margin stability and deposit franchise strength. However, structurally, the lending ecosystem appears far more resilient than in prior credit cycles.

Do you think the current IT disruption will ultimately expand the scope of work?

Yes, historically, every major technology disruption from cloud to automation initially compresses margins and disrupts legacy models, but eventually expands the overall opportunity set.

AI-led automation may reduce low-end repetitive work but simultaneously create demand for higher-value consulting, integration, cybersecurity, governance, and platform engineering.

The scope of work typically shifts upward in complexity. Companies that invest early in capability building, reskilling, and client co-creation are likely to gain market share. Therefore, the disruption phase may be uncomfortable in the short term, but structurally it should expand the addressable market over time.

Is it better to have exposure to the entire consumption basket or to select segments within the consumption space?

In the current environment, a selective approach within consumption appears more prudent than broad exposure. Consumer durables and discretionary categories are likely to outperform staples in this phase. Durables benefit from premiumisation, urban demand recovery, financing availability, and replacement cycles.

Additionally, GST rationalisation and easing input costs can support operating leverage in this segment. On the other hand, FMCG continues to face volume pressures in certain rural pockets, alongside elevated competition and limited pricing power. While staples remain structurally stable, relative earnings acceleration is likely stronger in discretionary and durable categories over the near to medium term.

Have you taken significant exposure to the data centre segment, given that expansion has accelerated compared to the past?

We do have selective exposure to the data centre theme, though not through pure-play operators. Our allocation is routed through wires and cables manufacturers, renewable-focused power companies, and a Mumbai-based real estate player benefiting from commercial infrastructure demand.

The data centre build-out in India is accelerating due to cloud adoption, AI workloads, data localisation norms, and rising digital consumption. However, rather than taking concentrated exposure to operators where competition and capital intensity are high, we prefer ancillary plays that benefit from the ecosystem expansion- power transmission, renewable integration, and high-quality commercial real estate. This approach offers participation in the theme while mitigating execution and leverage risks.

Do you see greater opportunities in global equities than in India?

The opportunity set globally has broadened, particularly across Emerging Markets (EM), which have outperformed over the past year. Earnings momentum from AI and semiconductor-linked companies has supported several global indices and could continue to provide tailwinds.

That said, this is not an either-or call between India and global equities. India remains supported by domestic demand, policy continuity, and structural growth drivers. However, relative allocation decisions may tilt toward select EM markets where valuations are more attractive, and earnings acceleration is visible.

A diversified approach combining India’s structural growth story with selective exposure to global AI and semiconductor beneficiaries appears more balanced in the current environment.