Oil, trade deal concerns priced in by markets: Unmesh Sharma, HDFC Sec

In an exclusive interview, Unmesh Sharma, head of institutional equities, HDFC Securities, discusses FII flow, trade tariffs and market outlook

As the July 9 US tariff deadline nears, UNMESH SHARMA, head of institutional equities, HDFC Securities, tells Sirali Gupta in an email interview that though the impact on the markets is unlikely to be major at the aggregate earnings level, the largest impact at the sector level, if any, would be on defence and oil procurement. Edited excerpts:

 

As the July 9 trade tariff deadline is approaching, how do you think potential changes could affect the market sentiment and specific sectors?

We are of the view that India will close a deal with the US, which will be a win-win at the aggregate level. While the impact on the markets is unlikely to be major at the aggregate earnings level, the largest impact at the sector level, if any, would be on defence and oil procurement. The removal of tariff-related uncertainty may lead to a small relief rally in the markets. In any case, investors should not underestimate the ability of Indian corporates and entrepreneurs to adjust and turn any potential opening of the economy to competition into a long-term opportunity.

 

What are the key risks to the markets in H2, and to what extent are they priced in?

The key risks include geopolitics- its impact on oil prices as well as the trade deals between US and the other countries. However, India is better placed to manage this uncertain geopolitical scenario given its sound fiscal health and robust forex reserves ($700 billion) which cover 11 months of imports and 96 per cent of the country’s external debt.

 

While there has been heightened news flow around both oil prices and trade deals, the ongoing market consolidation suggests that these concerns may already be priced in. On a country level, the usual risks of an asset cycle at banks and potential earnings downgrades appear to be priced in as well. Therefore, there seems to be no immediate reason for a sharp market downturn in the short-term.

 

How do you see flows to the emerging markets (EM) play out in the next 8-12 months? Will FIIs chase Indian equities with 'animal spirits'?

The EM scenario has now turned into a collection of micro markets rather than a single monolith, which has further been exacerbated by the ongoing trade deal scenario emanated from tariff modifications. Currently, India benefits from two major factors. Firstly, India is not very dependent on exports, structurally. Furthermore, India is quite likely to close a deal with the US, so the tariff impact on exporters is estimated to be minimal. Secondly, the US is trying to engineer a US Dollar depreciation. While this has an impact on Indian exporters, for foreign portfolio investors (FPIs) investing in India, this reduces the risk and cost of hedging the currency thereby improving expected returns for foreign investors. So, overall, we believe FPI flows would remain healthy.

 

What are your expectations for India Inc’s performance in the second half of CY25? Which sectors or companies do you foresee delivering strong results?

As per our observations, the downgrade cycle at an aggregate level for FY26 seems behind us. There could be some downside on FY27 earnings but that also will be limited to 3-4 per cent. Hence, we are not building in any significant downgrades at aggregate levels, while sector-specific headwinds may exist in specific pockets. Based on our estimates, we expect consumer discretionary, cement, chemicals, and industrials to deliver strong earnings growth in FY26. Accordingly, we have an overweight stance on these sectors in our HDFC Securities Institutional Equities model portfolio.  

 

How do you perceive overall market valuations now? Are there any sectors or stocks you believe are overvalued at present?

Overall market valuations remain above long-term mean (Nifty is currently trading at 21.3x PER on 1 year forward vs 10-year average of 20.4x). However, the consolidation phase of the last few months has led to this looking more reasonable. Last quarterly results seem to indicate that the downgrade cycle may be close to an end. In about 4-6 months, the market will start to look at FY27 PE, which at 18.7x looks more reasonable (vis-à-vis 10 yr average of 17.5x).

 

While we may not find any sector as significantly overvalued in its entirety, specific coverage stocks within consumer discretionary, industrials, chemicals, consumer durables and energy seem overvalued.

 

Your overweight and underweight sectors? Any contra bets?

We believe the risk-reward is skewed in favour of companies with strong earnings visibility. Stock-specific bottom-up ideas now hold the key for outperformance rather than sectoral calls, at this juncture. In this scenario, our preferred sectors are large banks and IT, consumer discretionary, real estate, cement, and capital goods. We remain underweight on oil & gas, mid-cap IT, small banks, and NBFCs.