Daily Voice: Possibility of a 5–6% market correction due to global volatility, says HDFC Securities' Varun Lohchab

Do you anticipate pressure on capex-related stocks in H2FY26?

Government capex was front-loaded during the first four months of FY26 but is now showing signs of slight moderation. Moreover, the second half of FY25 had a relatively high base, which could lead to some softness in government spending during H2FY26. On the private capex front, after three consecutive years of strong growth—driven largely by manufacturing—a temporary pause is likely.

That said, manufacturing remains a key area of focus, with ongoing investments in capacity expansion and technological upgrades. Sectors such as automotive, electronics, and renewable energy continue to play a prominent role.

Private defence companies are also expected to post healthy mid-teen revenue growth in FY26, supported by robust domestic demand and favourable government policies. As a result, while overall private sector capex may enter a phase of strategic consolidation in H2FY26, targeted investments in core sectors like manufacturing and defence should help sustain economic momentum.

In summary, we anticipate a period of mild consolidation for capex-related stocks in H2FY26, followed by renewed strength as sectoral tailwinds reassert themselves.

Do you expect the IT sector to perform better in Q2FY26 compared to Q1, with margins turning out better than feared? Have you started accumulating stocks in the sector?

We expect the IT sector’s performance in Q2FY26 to remain stable, mirroring the trends seen in Q1FY26. The demand environment across key geographies and verticals has yet to show any meaningful signs of recovery. Although deal bookings have been robust for several companies, they have not yet translated into significant revenue growth.

As a result, while we have reduced our underweight position in the sector, we are not aggressively accumulating IT stocks at this stage. Valuations have corrected to more reasonable levels, but we are waiting for clear and decisive indicators of demand revival before increasing our exposure.

Do you foresee a slowdown in overall Q2FY26 earnings? Which sectors are likely to outperform or underperform in terms of earnings growth?

Overall, we do not anticipate a significant slowdown in aggregate earnings for Q2FY26, although some sectors may experience mild softness. Commodity segments—particularly metals and oil & gas—are expected to benefit from a cyclical rebound and are likely to outperform. The steel sector, in particular, should receive support from the safeguard duties imposed on various steel categories.

Conversely, banks may underperform slightly as they navigate the final phase of NIM compression. While deposit repricing has already begun, its full impact is expected to materialize from Q3FY26 onward as the process gains momentum.

Is there a possibility of earnings downgrades in the September quarter?

For the HSIE coverage universe, earnings growth is projected at 11.7% for FY26E and 16.4% for FY27E. After a significant downgrade in Q4FY25, the pace of earnings cuts moderated in Q1FY26. While a minor downward revision in FY26 estimates cannot be entirely ruled out, we do not anticipate any major earnings downgrades going forward.

On the positive side, consumption sector is expected to pick up, driven by GST rate reductions, and NIM compression for banks is likely to begin normalizing from Q3FY26. These two factors should help cushion against any substantial earnings revisions.

Do you expect a strong rally in the metals sector?

India implemented a 12% safeguard duty on certain steel imports for a period of 200 days starting in April 2025, which has provided support to the domestic steel industry. The government is now considering raising this provisional duty to 24% in response to a surge in low-cost steel imports, particularly from Chinese companies that may be bypassing existing regulations. In addition to these protective measures, the government's continued emphasis on infrastructure development is expected to sustain strong domestic demand for metals.

However, it's important to recognize that a sustained and significant rally in global metal prices is unlikely without robust economic growth in China, which contributes approximately 45–50% of the world's production of steel, aluminum, copper, lead, zinc, and rare earth elements. Given the current outlook, we do not foresee a major uptick in China's GDP growth in 2025, and therefore, a broad-based metal price rally seems improbable. That said, short-term price spikes driven by domestic factors remain a possibility.

Given the uncertainty around tariffs and the India-US trade deal, do you strongly expect the RBI MPC to hold policy rates in both the October and December meetings?

Over the past year, the Reserve Bank of India (RBI) has reduced the repo rate by a total of 100 bps. With a comfortable inflation trajectory, the RBI has room to cut rates further by 25-50bps. However, given the strong Q1 GDP number along with the recent consumption boost from GST cuts, we do not expect the RBI to cut policy rates further in the current cycle.

If India-US trade negotiations face further delays, do you see a potential 5% downside in the markets—even if domestic factors remain supportive?

Ongoing uncertainties surrounding India–US trade negotiations—such as implementation of 50% tariff on Indian exports, the imposition of H1B visa fees and tariffs on pharmaceutical products—continue to create a fragile and unpredictable environment.

On the domestic front, factors like expected robust festive season demand, the positive effects of GST rate cuts, and the support from low interest rates are likely to provide some cushion to the markets. However, a modest correction of 5–6% due to global volatility remains a possibility. Looking ahead to the medium term, strengthening quarterly earnings are expected to be the key driver of market growth.

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