Daily Voice: Time to buy midcap, smallcaps as valuations become attractive, says Invasset PMS' Anirudh Garg

FY26 earnings estimates are subject to multiple macroeconomic and sector-specific factors, and while some risks exist, broad-based downward revisions are not yet a consensus expectation. Key considerations include GDP growth, interest rate trends, inflation, and corporate profit margins. If global growth slows or inflation remains stubbornly high, earnings could face pressure, particularly in rate-sensitive sectors such as banking, real estate, and consumer discretionary.

Additionally, geopolitical uncertainties and supply chain disruptions may impact profitability across industries. However, several tailwinds could support earnings resilience. India’s structural growth story remains intact, with strong domestic demand, government infrastructure spending, and robust manufacturing and services activity. Corporate deleveraging, improved balance sheets, and efficiency gains could also help sustain margins despite external headwinds.

Given current estimates, any downward revision would likely be selective rather than broad-based, with sector-specific earnings adjustments based on evolving economic conditions. Investors should closely monitor quarterly earnings trends, management commentaries, and macro data to assess potential revisions.

Are you concerned about economic growth for FY26, given that capex hasn't picked up and consumption has slowed down?

While there are concerns about sluggish capex, we believe that several policy measures will support economic growth in FY26. The government’s initiatives, such as raising tax slabs, will boost disposable income, thereby encouraging higher consumer spending. Additionally, the Reserve Bank of India’s (RBI) expected first rate cut in five years will reduce borrowing costs, stimulating both consumer demand and private sector investments.

Moreover, the RBI’s Open Market Operations (OMO), aimed at infusing liquidity into the economy, will further enhance credit availability, supporting both consumption and business expansion. These measures are likely to offset near-term weaknesses by improving sentiment, increasing purchasing power, and driving demand across key sectors.

Are you betting on the discretionary consumption sector?

While we recognize the long-term potential of the discretionary consumption sector, our exposure remains selective. Consumer sentiment and spending patterns are influenced by multiple factors, including interest rates, inflation, and income growth. With the government’s initiatives to boost disposable income and the RBI’s expected rate cuts, the sector could see some recovery.

However, given the current macroeconomic environment, we remain cautious and focused on specific opportunities rather than making an aggressive bet. Our investment approach prioritizes businesses with strong fundamentals, pricing power, and the ability to sustain margins despite market fluctuations. We continue to monitor evolving consumption trends and macroeconomic indicators, adjusting our exposure accordingly.

Considering the global uncertainty due to Trump's unpredictability, are you bullish on gold?

We are cautiously bullish on gold, given the heightened geopolitical uncertainties and central bank buying. The unpredictability surrounding a potential Trump administration, coupled with broader global tensions, has increased demand for safe-haven assets. A similar situation was observed with Russia, where financial sanctions and asset freezes triggered a shift towards gold as a hedge against geopolitical risks. This fear-driven buying, particularly among central banks, has been a key driver of gold’s recent upside momentum.

Additionally, potential policy shifts in the US, including trade tariffs or aggressive monetary measures, could lead to dollar volatility, further supporting gold prices. While real interest rates remain a crucial factor influencing gold’s trajectory, any dovish pivot by central banks, including the Federal Reserve, could provide further tailwinds. However, given gold’s recent rally, we maintain a measured stance, recognizing both its role as a hedge and the need for disciplined positioning in portfolios. Investors should view gold as a diversification tool within a broader portfolio rather than a standalone bet.

Are you maintaining a cautious stance on the equity market for the rest of 2025, given the downward movement since October 2024?

While market volatility has increased since October 2024, we have strategically navigated these shifts by adapting our portfolio positioning. When markets entered an expensive zone, we pivoted towards low-beta stocks to manage risk effectively. As valuations reached exuberant levels, we stood apart as the only PMS in India to move to 100% cash, safeguarding capital ahead of the correction.

Now, with mid-cap and small-cap stocks having corrected significantly—many trading at a 30%+ discount—we see this as a compelling investment opportunity. Valuations have become attractive, and we are strongly bullish for the next two years. Economic fundamentals remain intact, and with policy support from the government and the RBI improving liquidity and sentiment, we believe this phase offers a rare chance to accumulate high-quality businesses at reasonable prices.

Historical trends suggest that such corrections provide a healthy market reset, setting the stage for strong future returns. Our focus remains on companies with solid earnings visibility, strong balance sheets, and resilient business models. While maintaining disciplined risk management, we are actively increasing exposure to quality mid-cap and small-cap stocks, positioning for a strong upcycle in the coming years.

Do you foresee a major impact on the pharma sector if the US imposes 25% tariffs on pharma?

The impact of a 25% tariff on US pharma imports would vary across segments. The generics market, which operates on thin margins and relies heavily on imported active pharmaceutical ingredients (APIs), would face significant cost pressures. Given the price-sensitive nature of generics, these additional costs could lead to higher drug prices or margin compression for manufacturers. We are not particularly bullish on this segment due to these structural challenges.

However, we remain more optimistic about the Contract Development and Manufacturing Organization (CDMO) and Contract Manufacturing Organization (CMO) segments. These businesses cater to global pharmaceutical companies with specialized capabilities, offering high-value services beyond just cost arbitrage. With increasing outsourcing trends and a push for supply chain diversification, CDMOs and CMOs are well-positioned to benefit from long-term structural tailwinds.

While short-term disruptions from tariffs could affect input costs and supply chains, the strategic shift towards high-margin, innovation-driven outsourcing models should support growth in the CDMO/CMO space. Companies with strong execution capabilities, regulatory compliance, and global partnerships are likely to navigate this landscape better, making this segment more attractive from an investment perspective.

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