Daily Voice: These 3 risk factors pose some challenges to market direction in near term, says this fund manager

Neeraj Gaurh is the Fund Manager at Axis Securities PMS

In the near term, macroeconomic risks like trade policy uncertainty, relatively expensive valuations (in some pockets) even after the correction, and absence of a positive trigger (we still have 40 days for Q4FY25 earnings season) will continue to pose some challenges to the market direction, said Neeraj Gaurh, Fund Manager at Axis Securities PMS in an interview to Moneycontrol.

On the sectors front, especially after correction, Gaurh is focussing on the telecom, healthcare, and cement sectors. At current juncture, he is looking to buy more of large caps or large mid-caps, unless there is a specific bottom-up idea in small caps space, he said.

What were the major risk factors that played a key role in the correction over the past five months?

Nifty 50 reached an all-time high of 26,216 on September 26, 2024. However, the benchmark has since seen a correction of 16% from the peak. Broader market indices, including Midcap and Small cap indices, corrected by 21% and 25%, respectively. The correction was driven by factors like subdued earnings, elevated valuations, de-acceleration in fiscal spending, currency devaluation, and geopolitical uncertainties including Trump Tariffs.

Do you think most of the concerns are behind us, and do you expect the bulls to come back strongly in the coming months?

In the near term, macroeconomic risks like trade policy uncertainty, relatively expensive valuations (in some pockets) even after the correction, and absence of a positive trigger (we still have 40 days for Q4FY25 earnings season) will continue to pose some challenges to the market direction. The high frequency indicators for the economy may start looking up from May/June and earnings expectations would be normalized by then.

Where would you like to add or increase exposure among sectors after the recent sharp correction?

We are considering the Telecom, Healthcare, and Cement sectors. Reversal of banking under performance can come when liquidity conditions improve. At current juncture, we are looking to buy more of large caps or large mid-caps, unless there is a specific bottom-up idea in small caps space.

Do you believe the markets are least bothered about Trump tariffs now?

Clients are reasonably confident on India story but there are lot of queries around Trump Tariffs and potential impact on Indian companies. Tariffs can disrupt corporate earnings and supply chains. Currently, we are all in a wait-and-watch mode regarding the situation with Trump's tariffs.

Will earnings growth return to strong double-digit in FY26 after muted expectations for FY25?

The consensus is currently building between 13%-14% earnings growth for FY26. Overall, FY26 will likely be better as compared to FY25. Like Q3FY25, Q4FY25 earnings will continue to be challenging for the cyclical sectors. More promising numbers are likely to be visible from Q1FY26, which will be led by the base effect (lower base due to the election), the likelihood of improvement in the high-frequency indicators, the expectation of higher government spending, and a pick-up in consumption.

Is this the best time to start accumulating positions in consumption, IT, and pharma sectors?

The earnings for the IT sector were largely stable (with positive commentary from mid-tier companies), and that should continue. However, valuations for the IT sector are still relatively higher. On the consumption side- FMCG has seen moderate volume growth, with revenue growth primarily driven by rural areas, which recovered and outpaced urban growth.

Earnings growth in the consumption sector is expected to improve in FY26, supported by the consumption boost from the Union Budget. Urban-focused sectors like discretionary consumption, QSR, retail, and travel & tourism are in a stronger position compared to previous periods.

Pharma companies reported decent or good third quarter earnings. We remain overweight on pharma sector. CDMO (contract development and manufacturing organisation) sector is showing promising outlook, but investors need to be watchful of their entry valuations.