“The demand is being driven by renewable power and the associated need to strengthen power transmission and distribution. Additionally, there has been an improvement in defense sector order announcements in recent months, and growth in electronics manufacturing services remains strong,” he says. Edited excerpts:

The next 3-4 weeks are going to be action-packed for investors amid the ongoing Q3 earnings season, Trump‘s swearing-in, Fed meeting and Union Budget back home. What is going to be your strategy when volatility is likely to be higher than usual?
Indeed, the next few weeks will be action packed with a lot of events on the horizon. I believe that the best strategy is to stay invested and focused on the overall philosophy of the fund house as well as individual funds. I may make a few changes to the portfolio based on where we see opportunities on a relative basis. The results season may show Earnings growth in mid-single digits due to weak top-line growth. I do anticipate the results to bottom out this quarter before showing signs of a turnaround. It’s important to remember that markets often move ahead of events, and much of the news around the US swearing-in ceremony and other events is likely already priced in. The Union Budget is a highly anticipated event, and one needs to see the reforms and the policies implemented by the government.

Do you think that earnings downgrades will come back in Q3 result season to haunt investors once again? What are your broad sectoral expectations from Q3 earnings?
As I mentioned, earnings growth is expected to be in single digits. I expect automobiles may face margin pressure due to higher discounts, banks may see slower loan growth and a steady rise in loan-loss provisions, construction materials may see weak realizations, consumer staples can witness slowing urban demand. Meanwhile, capital goods have seen a healthy demand environment, pharmaceuticals could see continued stability in US generics pricing, along with traction across most other markets, real estate – improvement in launches.

While the consensus of brokerages seems to be in favour of Largecap stocks, a number of Bluechips have underperformed in the last 2-3 years. Do you think valuations of those bruised Bluechips are attractive enough in 2025?
Over the long term, market returns generally align with nominal GDP growth, and we expect this trend to persist. After significant outperformance in sectors such as real estate, pharma, IT, auto, and capital goods, these sectors might see some consolidation in the near term. These have been the sectors with higher earnings growth and higher valuations than their pre-COVID levels. In contrast, sectors with relatively lower earnings growth, such as FMCG, lenders, energy, and metals, are not as expensive compared to their pre-COVID valuations. In the past three years, mid and small caps have been viewed as expensive but have demonstrated superior growth compared to large caps, leading to their outperformance. However, the substantial valuation gap caused by the underperformance of large caps relative to mid and small caps makes it essential to focus on absolute growth rather than absolute valuations in both segments. Consequently, the market is likely to become more stock-specific and we anticipate that high-valuation sectors may consolidate in the near term if they lack new earnings growth drivers. Nonetheless, we continue to find opportunities across the market.

Given the Street’s low expectations from the Q3 earnings season, do you think that Nifty’s current valuation is reasonable enough to limit a large downside unless it is triggered by a shocking external event?
Markets are not unidirectional, and I do believe that the next few months could see volatility in markets or bouts of consolidation despite the correction since September 2024. Valuations still remain elevated. Nifty is relatively better valued than the small and midcaps. However, one can never truly predict markets.

What could be the impact of Donald Trump’s presidency on Indian equity markets? IT is being seen as a winner but there is a threat around tighter visa regulations. Which Indian exporters are likely to get impacted negatively from Trump rule?
It is difficult to say at this point in time. The tariffs on China and other countries proposed by US President-elect could significantly impact global trade. However, during his first term, the tariffs on China benefited India, and this time, India might again be able to turn these trade restrictions into an opportunity. Again one can not really predict his policies would be unfavourable for which type of exporters but a weak rupee will definitely benefit pharma and IT companies.

What are your expectations from the Union Budget from a capital markets perspective?
Overall, I believe the government will continue on the path of fiscal consolidation and reforms. Regarding capital markets, there have been expectations of modification in income tax slabs and if this is carried out, domestic consumption can receive a boost. Capital gains tax rationalisation is one of the key areas that everyone has been focusing on. In its previous budget, the government had rationalised the capital gains structure in terms of holding period of assets and tax rates.

The capex theme slowed down after the Lok Sabha election results were declared in June last year. Is there a play in rail, defence and other capex stocks in the run-up to the Budget or do you think one is more likely to be disappointed?
The capital goods sector has demonstrated strong earnings growth across various macroeconomic scenarios over the past three years. This has led to its outperformance and overvaluation, which peaked around May 2024. Following this peak, the sector began to consolidate. Nonetheless, the relative growth in the capital goods sector remains superior to other sectors, while some segments of the consumption part of the economy have deteriorated recently. Consequently, after the consolidation, markets have shifted focus back to the capital goods sector. The demand is being driven by renewable power and the associated need to strengthen power transmission and distribution. Additionally, there has been an improvement in defense sector order announcements in recent months, and growth in electronics manufacturing services remains strong. Overall, we expect select capex and PSU companies to continue performing well in 2025.

Following the correction in the market seen post September-end peak, which sectors have become attractive from a valuation perspective?
Going forward market performance could be influenced by earnings growth and absolute valuations. Given near-term growth challenges, likely muted foreign institutional investor (FII) inflows, and subdued earnings expectations, significant valuation expansion seems unlikely. We expect 2025 to be a year of stock picking across market caps. The recent corrections in mid and small caps could present opportunities to increase exposure to select stocks. We believe that markets are gravitating towards companies with clear earnings growth visibility and a lower likelihood of significant earnings downgrades. Accordingly, we believe that for the first half of 2025, key themes to watch include sectors such as Information Technology, Pharma, Quick Commerce, Capital Market beneficiaries, Travel/Tourism, Renewable Capex, Power Transmission & Distribution, EMS, Defense, and select Auto companies with new product launches on the horizon. However, many of these sectors currently have high valuations. By the second half of 2025, markets may shift focus to potential triggers in underperforming sectors such as Lenders, FMCG, and IT.