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"I don't believe the market has fully factored in the extent of the upcoming expected earnings downgrades," said Divam Sharma of Green Portfolio PMS in an interview to Moneycontrol.

According to him, geopolitical tensions, including the reciprocal tariffs between the US and China threatening global trade, as well as escalating India-Pakistan tensions following the Pulwama attack, create a highly unpredictable environment.

Sectors like IT services, discretionary consumption, global cyclicals, and parts of consumer staples are at higher risk of earnings downgrades, said the Co-Founder & Fund Manager at Green Portfolio PMS.

Do you think the market has not fully factored in the extent of the upcoming expected earnings downgrades?

No, I don't believe the market has fully factored in the extent of the upcoming expected earnings downgrades. As the old saying goes, "you cannot time the markets." There's simply too much uncertainty at play.

Geopolitical tensions, including the reciprocal tariffs between the US and China threatening global trade, as well as escalating India-Pakistan tensions following the Pulwama attack — create a highly unpredictable environment. If any of these conflicts were to escalate into prolonged confrontations without clear resolutions, markets could react sharply. In such a fragile global setup, earnings estimates are vulnerable to significant revisions, and the market may not yet be fully pricing in these risks.

Which sectors are at risk of earnings downgrades and which are poised to benefit from earnings upgrades?

In the Indian market, sectors like IT services, discretionary consumption, global cyclicals, and parts of consumer staples are at higher risk of earnings downgrades.

The IT sector has already seen muted revenue growth, with major players like Infosys and Wipro cutting FY26 and FY27 guidance amid slowing global tech spends. For instance, Infosys fell short of its own guidance of 4.5-5% after reporting a growth of 4.2% in FY25.

Global cyclicals, especially parts of the auto sector, remain under pressure as both domestic and international auto sales stay weak. In FY25, passenger vehicle sales in India showed a modest growth of 2.6% YoY. Even consumer staples, typically resilient, are seeing urban demand softness, with volume growth slowing to low single digits.

On the brighter side, sectors like BFSI, healthcare, telecom, and industrials are poised for earnings upgrades.

Banks are reporting strong credit growth of around 16% YoY with stable asset quality, while healthcare (hospitals and pharma) benefits from rising domestic demand and global exports. Telecom continues to thrive, supported by increased data consumption. Industrials are also gaining momentum, fueled by a record Rs 11.11 lakh crore capex allocation in the Union Budget 2024.

In short, despite global uncertainties, India’s domestic growth engines, particularly those tied to policy support and structural demand, offer promising earnings visibility.

What are the key challenges for the market in FY26?

As we look ahead to FY26, the ongoing tensions between India and Pakistan, along with global trade wars and political instability elsewhere, certainly add to the unpredictability. On top of that, the Indian Rupee is expected to weaken further, potentially hitting around 86.50–87.00 against the US Dollar, which could put additional pressure on inflation, especially with raw material costs on the rise.

Locally, we might also see some hurdles. Retail consumption could slow down, and a potential liquidity crunch in the banking system might dampen domestic demand and affect corporate earnings. The global economic landscape remains fragile, with conflicts and disruptions to supply chains making things even more uncertain.

That said, it’s not all doom and gloom. The Indian economy still has plenty of positive momentum. Things like favourable monsoon forecasts, ongoing infrastructure development plans, and easing food inflation could provide some stability. Despite the challenges, India’s growth potential remains solid, but managing these risks carefully will be crucial to handle external tensions and domestic consumption patterns.

Do you believe the market has already priced in most of the risks related to the tariff war?

There’s always uncertainty in the market. We have begun to witness a global shift in trade. But a pause in the tariffs for 90 days has brought some relief for the investors. India has also become the first major country to erase losses from tariffs introduced in April. Although a lot of geopolitical factors are coming into play but talking about tariffs specifically, it was not long when investors had an epiphany that it's a winning game for India.

Even if the US-China dispute eventually cools, the damage to trust among importers is done, pushing them to seek alternative sources, a trend that places India firmly on the global trade map.

At the same time, one should not ignore the fact that doing business with Trump is very tricky and isn’t very reliable. He changes his stance anytime, anywhere. So that uncertainty is still not priced by the markets.

Which sectors are looking attractive for buying at these levels?

As a fund house, we have always been more focused towards the manufacturing sector. The recent market correction has opened gates to new opportunities. Manufacturing and mining are good industries. In manufacturing, Defence is a scalable story for many years to come. Also, we like Infra, chemical and Pharma. China + 1 (2.0) is here. Make all your decisions in light of that.

Also, to keep an eye on India's commitment to achieving 500 GW of renewable capacity by 2030, which creates a substantial growth runway. However, as my co-founder says, dumping from China is a concern in light of Trump’s ‘drill baby drill’ slogan.

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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