Earnings recovery critical for market rerating, says Sailesh Raj Bhan

Equity markets have spent nearly nine months consolidating since June 2024, says Bhan

Markets have entered the second half (H2) of calendar year 2025 (CY25) near record highs. Sailesh Raj Bhan, chief investment officer for equity investments at Nippon India Mutual Fund, tells Puneet Wadhwa in an email interview that the sticky nature of systematic investment plans (SIPs), high liquidity, and the recent revival in market sentiment — along with improved earnings expectations — are likely to support domestic flows even in H2CY25. Edited excerpts:

 

What are the top risks that investors should be aware of in H2CY25?

 

Given the large geopolitical developments, global growth rates may face challenges — a key risk. Earnings growth recovery over the next three to four quarters will also be critical, especially for Indian mid and smallcap stocks. A large supply of low-quality paper could emerge as a risk if investors face poor outcomes. 

Are valuations a worry at current levels?

 

Equity markets have spent nearly nine months consolidating since June 2024. The recent pullback has been driven by a sharp drop in interest rates, liquidity support, and lower oil prices — all of which have improved expectations for an earnings recovery in the coming quarters. Earnings in the January–March quarter of 2024–25 were ahead of modest expectations but fell short of the long-term trend. A recovery in earnings of over 12–15 per cent will be critical for any market rerating.

 

Your view on mid and smallcaps?

 

The recent correction has been sharper in select mid and smallcap stocks, where earnings have disappointed. While valuations in these segments remain rich, trying to time entry and exit can lead to poor long-term outcomes. SIPs in mid and smallcaps can help investors take advantage of volatility and are the best way to participate in the current environment, as growth expectations are slowly improving. 

 

Top three sectors that could help markets gain momentum?

 

Banking, financial services and insurance, pharmaceutical, and consumer discretionary are well-positioned, thanks to a favourable growth–valuation equation. Discretionary spending could also benefit from falling interest rates and tax cuts. However, challenges persist in information technology (IT) services, particularly due to growth issues and rapidly evolving developments in artificial intelligence.

 

How are foreign institutional investor (FII) and domestic institutional investor flows likely to play out in the rest of CY25?

 

FII flows are expected to remain strong, especially since their share in Indian equity ownership has dropped to below 18 per cent from over 25 per cent a few years ago. The sticky nature of SIPs — averaging close to $3 billion a month — along with high liquidity, improved earnings expectations, and a revival in market sentiment, should continue to support domestic flows in H2CY25.

 

Do you expect retail flows to chase fresh issues in the primary markets rather than the secondary market over the next few months?

 

The appetite for new issues remains high, particularly in a bull market. This is despite the relatively poor performance of primary and follow-on offers over the past year or two, owing to weak earnings growth. A large pipeline of upcoming issues will likely keep momentum and interest high in this space. 

 

What’s your view on public sector stocks?

 

Public sector banks have underperformed their private sector peers and are, therefore, more reasonably valued. Defence stocks have delivered strong returns following recent geopolitical developments, and much of the near-term upside appears to be priced in. Power utilities seem better placed, given their current valuations relative to growth potential.

 

How should one approach the automotive, metals, and IT sectors?

 

Discretionary segments like automotive and consumer durables may surprise on the upside, given the low base of the past two years. Growth in both rural and urban areas could improve, driven by tax cuts, low interest rates, and increased risk appetite from banks.

 

Expectations are low for metals, and from a valuation standpoint, the sector looks better placed after underperforming. IT services require close monitoring — rapid shifts in the tech landscape could affect short-term growth prospects.

 

Can the consumption sector be the dark horse?

 

The consumer sector is entering with very low expectations after three years of disappointing growth. At these levels, it trades at fair valuations. A recovery in growth could spring a surprise, especially since market positioning in this space is light. 

A storm of uncertainty

Risks investors must watch in H2CY25

 

*  Global growth under pressure: Geopolitical churn could weigh on worldwide expansion

  *  Earnings at a crossroads: Recovery over next 3-4 quarters is vital, especially for mid and smallcaps

  *  Paper chase, gone wrong: A glut of low-quality issues could sting investors chasing momentum