Trump tariffs give India competitive edge in select sectors: Taher Badshah

Uncertainty was expected in equity markets following the US election, but the rapid pace of policy changes has exacerbated volatility, says Taher Badshah, chief investment officer at Invesco Mutual Fund. In a telephonic interview with Abhishek Kumar, Badshah said that the fund house has moderated earnings growth and returns expectation for the near-term. Edited excerpts:

 

What are the implications of Trump tariffs on India and global markets?

 

The 26 per cent tariff, while higher than expected, is considerably lower than those applied on other Asian countries such as China, Vietnam, Indonesia, and even Bangladesh. This can provide India a relative advantage in certain product categories such as textiles, chemicals, and footwear, where reshoring is flexible and may be a blessing in disguise for us over the medium-term.

 

At a granular level, with some sectors like pharmaceuticals kept out of purview for now, the overall impact on India is likely to be more indirect than direct. Sectors such as automobile, technology (indirect), and chemicals may have most to lose if these tariffs are imposed as announced. While the sectoral impact seems limited, the tariffs induced US-led global economic slowdown and the supply-chain dislocation, if any, will impact India’s overall external sector growth.

 

How do you assess the current market? When do you expect a turnaround?

 

Entering 2025, we expected the slowdown to extend into the first half, thereby followed by a recovery. However, the market correction has been sharper than expected, particularly in the broader markets.

 

On the domestic front, there are now signs of improvement. Liquidity measures, interest rate cuts, and government spending commitments should support growth, though their results will take a few quarters to show. By the second half of 2025, cyclical challenges should start resolving. A lower growth base will make future earnings appear stronger, and we may see an earnings upgrade cycle.

 

Globally, uncertainty around US elections was anticipated, but the pace of policy shifts has added to the volatility. Trade negotiations could slow US growth while India’s downgrade cycle may bottom out, reversing fund flows. However, China could compete more for emerging market allocations, meaning India’s valuation expansion may be more measured than in previous cycles.

 

Has the change in market conditions resulted in any major shifts in fund portfolios?

  Changes in our portfolio is driven by shifts in investment arguments, such as earnings disappointments or structural challenges rather than short-term market fluctuations. Also, given the speed and intensity of recent corrections, making immediate adjustments was challenging.

 

Currently, we are reassessing parts of our portfolios as some sectors and stocks have delivered lower than expected earnings growth.

 

Broadly, we are adopting a more conservative earnings outlook and adjusting return expectations. The hurdle rate for earnings growth has been recalibrated from 15 per cent to 10 per cent. Sector rotations initiated last year, like reducing exposure to public sector undertakings and overvalued industrial stocks, and increasing allocations to technology, private banks, and value retail are ongoing.

 

Going forward, we maintain a measured approach: moderate return expectations, a back-ended recovery view, and a focus on stock-specific fundamentals over macro-driven sentiment.

 

How do you see valuations, have they turned attractive?

  Valuations aren’t exactly cheap but they are more attractive than before across the market capitalisation segments. Largecaps appear less expensive at around 18-18.5x earnings, assuming 12-13 per cent compound annual growth rate over the next two years. 

 

Midcaps, at 26-27x, and smallcaps around 22x, may seem expensive but have also corrected significantly. While growth stocks have been hit hard, companies with lower growth expectations have held up better due to lower ownership and modest valuations. Valuations should be looked at in the context of growth potential – absolute cheapness isn’t enough.

 

Should investors consider raising equity allocation?

  For investors, the current downturn presents an opportunity. Those who invest now or over the next few months, could benefit from stronger returns as the market recovers in late 2025 and beyond. Investing more during market dips has historically led to better long-term compounding. Investors should gradually rebuild their equity allocations based on their risk appetite.

 

Going by the valuations and growth expectations, which sectors are most attractive right now?

  Banking and financial services, particularly private sector banks, appear attractive on both absolute and relative valuations. Some non-banking financial companies also look cheap, but asset quality concerns remain, making banks the preferred bet, especially with rate cuts and a regulatory shift towards growth.

 

Information technology stocks are appealing from an operating cash flow yield perspective, but price-to-earning multiples may remain compressed due to macroeconomic and global uncertainties. While earnings are likely to improve over the next year, stock returns may be muted in the near term.

 

Retail is a mixed bag. Some high-end retailers remain resilient, while value retail and mid-level segments present selective opportunities. Real estate has corrected significantly, but given long cycles in the sector, we are likely in a pause rather than a downturn, making certain stocks appealing.

 

Industrials – especially power transmission, renewables, defense, and urban infrastructure – continue to offer long-term opportunities, despite near-term slowdowns in public capex. Many companies have strong order books, providing earnings visibility for 18-36 months.

 

Commodities are trading above book value, making entry points less compelling unless there’s a clear bullish cycle ahead. Telecom, select manufacturing, and healthcare – especially mid-sized CDMO (contract, development, and manufacturing organisation)/CRDMO (contract research, development, and manufacturing organisation) players – offer pockets of value after correction.

 

Overall, sector selection should be valuation-driven but even within attractive sectors, careful stock selection remains key.