The risks related to US tariffs could moderate in the second half of 2025, but much will depend on global trade policies and geopolitical shifts, said Himanshu Kohli of Client Associates in an interview to Moneycontrol.
Additionally, with slowing domestic earnings growth and GDP concerns, Indian equities may face volatility in 2025, according to him. While structural growth drivers remain intact, external headwinds could lead to short-term corrections, he said.
He believes FY26 is likely to be a better year for banks compared to FY25. Valuations in the banking sector remain reasonable, especially when compared to other industries, making them an attractive investment opportunity, said the co-founder of Client Associates who has nearly three decades of experience in investment banking and private banking.
Do you expect the risks related to US tariffs to decrease in the second half of 2025, and will that boost equity markets?
The risks related to US tariffs could moderate in the second half of 2025, but much will depend on global trade policies and geopolitical shifts. President Trump has favoured tariff hikes over tax cuts, and if these policies continue, they could boost the US fiscal position at the cost of higher consumer prices. This inflationary impact may limit the Federal Reserve’s ability to cut interest rates in 2025, leading to tighter financial conditions globally.
A more hawkish Fed stance has negatively impacted emerging markets, including India, by strengthening the US dollar and leading to foreign portfolio investors (FPIs) shifting funds from Indian equities to US markets. As a result, the Indian rupee has come under pressure, affecting market sentiment.
Additionally, with slowing domestic earnings growth and GDP concerns, Indian equities may face volatility in 2025. While structural growth drivers remain intact, external headwinds could lead to short-term corrections.
Do you believe that FY26 will be a better year for banks than FY25? What is your preference among BFSI sectors—private banks, PSU banks, or NBFCs?
Yes, FY26 is likely to be a better year for banks compared to FY25. Valuations in the banking sector remain reasonable, especially when compared to other industries, making them an attractive investment opportunity. Additionally, the Reserve Bank of India (RBI) has been actively focusing on improving liquidity, which will enhance banks’ ability to extend credit, further driving economic growth. The increased credit flow will benefit both corporate and retail lending segments, leading to stronger earnings potential.
Among the BFSI (Banking, Financial Services, and Insurance) sectors, we prefer well-managed private sector banks. These banks prioritize governance, risk management, and operational efficiency, reducing the risk of bad loans and ensuring sustainable growth. While PSU banks have improved their asset quality and NBFCs continue to show resilience, private banks stand out due to their agility, strong management, and lower slippages, making them a more reliable long-term investment choice.
Is it the right time to have consumption stocks in the portfolio, or should one wait a bit longer to buy these stocks, even though the Finance Minister has announced tax relief?
The tax relief announced by the Finance Minister in the Budget is expected to boost disposable income, which will, in turn, accelerate consumption across the economy. Higher disposable income generally leads to increased spending, particularly in discretionary segments such as automobiles, electronics, and premium consumer goods.
Among consumption stocks, consumer discretionary companies are better positioned than consumer staples. This is because discretionary products have lower penetration in India, and the addressable market size remains vast. The tax cuts will further support demand in these underpenetrated markets, driving revenue growth for companies in this sector. However, investors should be cautious about valuations, as certain consumer discretionary stocks are already trading at premium levels.
While long-term prospects for the consumption sector remain strong, a staggered investment approach would be prudent. Investors should look for opportunities in fundamentally strong companies with reasonable valuations rather than rushing into stocks that are currently overvalued.
Have you seen a significant reduction in earnings estimates after the Q3FY25 numbers? Do you expect similar earnings growth in Q4 as well?
Yes, earnings expectations have been revised downward after the Q3FY25 results, but the decline has not been as severe as initially anticipated. While some sectors faced margin pressures and demand slowdowns, there are still bright spots in the economy.
Key economic indicators, such as the Purchasing Managers' Index (PMI), have shown consistent growth, signaling resilience in manufacturing and services. Additionally, low manufacturing inflation is helping companies manage costs more effectively, and, in turn, supports profitability. The tax relief announced in the Budget is another positive factor, as it will boost disposable income, potentially driving higher consumption and demand across various sectors.
For Q4FY25, earnings growth is expected to remain stable, supported by improving economic activity, government spending, and sustained credit growth. However, investors should remain selective, focusing on sectors that benefit from structural tailwinds while being mindful of global macroeconomic uncertainties that could impact growth momentum.
Which sectors have a lower likelihood of earnings cuts?
Sectors with strong structural demand, policy support, and resilient business models have a lower likelihood of earnings cuts in India. Banking & Financial Services (BFSI) remains well-positioned, particularly private sector banks and select NBFCs, due to robust credit growth, improving asset quality, and stable margins. The Reserve Bank of India's (RBI) liquidity measures and focus on economic expansion further strengthen the sector’s earnings visibility.
Similarly, consumer discretionary and auto sectors are poised for stable growth, supported by rising disposable incomes, tax relief, and increasing demand for premium goods and vehicles.
Other resilient sectors include information technology (IT), where large firms benefit from long-term contracts, cost optimization, and strong demand for digital transformation services. Pharmaceuticals and healthcare remain defensive plays due to strong domestic demand and export growth.
Additionally, industrials and manufacturing, supported by the government’s infrastructure push and PLI (Production-Linked Incentive) schemes, are expected to maintain earnings stability despite macroeconomic fluctuations.
Do you foresee no Fed rate cuts this calendar year, but one more from the RBI?
The likelihood of the Federal Reserve cutting interest rates in 2025 is uncertain due to persistent inflation and potential inflationary policies from the Trump administration. Market expectations vary, with some pricing in the possibility of no cuts or just a single reduction this year. The Fed's own projections suggest only two quarter-point cuts in 2025.
For the Reserve Bank of India (RBI), further rate cuts appear challenging given the macro conditions, including inflationary pressures and a weakening rupee. While the RBI has already implemented one rate cut, balancing GDP growth and inflation while managing the currency will require careful maneuvering, making quick & sizeable additional cuts less certain. The potential for increased inflation due to policies adds to the complexity of the situation for both the Fed and the RBI.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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