After nearly 16% correction from record high in the last five months, Krishnan VR of Marcellus Investment Managers is of the opinion that there are three risks to a more extended market drawdown.
According to him, the first is if the current domestic slowdown translates into something more structural and second is continued tariff related uncertainty for export facing companies.
And thirdly, if the equity investors, especially the new investors who are yet to see meaningful equity correction, decide to redeem. If all these risks play out together then a further 10-15% correction cannot be ruled out even considering a loose monetary policy, he believes.
Do you believe the earnings outlook is weak for small caps?
Yes, so if we look at the Q3FY25 result, revenue growth was in single digits whereas PAT declined on a YoY basis for the smallcap index. This was meaningfully weaker than revenue and PAT growth seen for top 100 companies and even compared to the mid cap index. As a result, FY26 consensus EPS estimates are down around 10% for the small cap index.
Do you think the sectors that experienced de-rating after Q3 earnings will continue to see de-rating after Q4 numbers as well?
High beta sectors except perhaps banks and financial services, has seen meaningful derating since the peaks of September last year. Consumer, FMCG and media stocks too have affected due to growth slowdown. Because government spending seems to have picked up after the slowdown due to elections in 1HFY25, we could see continued earnings momentum in railway, infrastructure and capital good stocks but outlook on new orders could be relatively muted, given the pivot in government spending priorities in the recent budget. Hence, I do not see strong triggers for meaningful valuation re-rating in these sectors after Q4 results.
Why is Trump considering a reciprocal tariff instead of a direct tariff on India?
The Trump administration is of the view that the US applies far lower tariff rates than other countries apply on US exports. Also, unlike other countries like China, India’s trade surplus with US is concentrated in few sectors like gems/jewellery, mobile phones, pharma, chemicals and petroleum products. So if US wants India to buy more US liquified natural gas, electronics and defense equipment then threatening reciprocal tariffs in order to browbeat us and other countries into cutting our own tariff rates on these categories arguably makes sense.
Do you foresee more favourable opportunities in the banking and financial services sector?
Opportunities are company specific but Banks and diversified financials broadly reported better results in Q3FY25 compared to other sectors. Even considering the weak macro backdrop, I think private banks are still well placed in terms of both valuations and fundamentals, though the valuation gap versus other sectors has narrowed somewhat over last 5 months or so, as BFSI sector has been the among the best performing on a relative basis over this period.
Do you believe the worst is over for equity markets, or is it too early to say? Why?
Too early to say as every drawdown has different drivers. In my opinion, there are three risks to a more extended market drawdown. Firstly, if the current domestic slowdown translates into something more structural. Secondly, while recent currency depreciation helps, continued tariff related uncertainty for export facing sector/companies ends up harming their export competitiveness and also increasing imported inflation.
Finally, domestic mutual funds and retail investors have been net buyers of equity over last few months even as foreign investors have been selling out. So if the equity investors, especially the new investors who are yet to see meaningful equity correction, decide to redeem after seeing the negative returns of last 5 months, then the current drawdown might lead to a self-reinforcing loop accentuating the correction further. If all these risks play out together then a further 10-15% correction cannot be ruled out even considering a loose monetary policy.
Do you expect global consumption and private capex to slow down due to tariff uncertainty?
Obviously any kind of tariff or currency volatility is a dampener for fresh investments. Atleast from what we have seen over last month or so, first round of US tariffs were focused on countries like China, Mexico and Canada, with which US has the largest trade deficits. Even here, actual tariffs on Mexico and Canada have been postponed pending negotiations. So tariffs announcements are being used by US as a negotiating tactic for duty reductions and to increase market access for US products to exporting countries.
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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