Tariffs not a trigger point to exit equities: Equirus Asset's Sahil Shah

FII inflows will return once India's earnings growth shifts back to double digits, most likely in H2FY26, says Sahil Shah, CIO and fund manager of Equirus Asset Management

As the markets come to terms with high US tariffs, Sahil Shah, CIO and fund manager at Equirus Asset Management, tells Sai Aravindh in an email interview that the best risk-reward trade-offs are in consumption, automobiles, and chemical sectors. These sectors, he believes, are at the intersection of reasonable valuations and earnings recovery potential. Edited excerpts:

 

How should investors position themselves in the markets amid 50 per cent tariffs on Indian goods? Is it advisable to stay in cash for a while?

 

Tariffs, while disruptive in the near term, are not a trigger point to exit equities. The peak of tariff risk is largely behind us; going forward, the situation is more likely to improve or remain stable rather than deteriorate. Export-oriented companies have already factored in most of this risk, and crucially, it is the US consumer who will bear the brunt of higher import prices.

 

Make smarter market moves with The Smart Investor. Daily insights on buzzing stocks and actionable information to guide your investment decisions delivered to your inbox.

Subscribe

 

At a macro level, the impact is contained. Exports to the US form less than 3 per cent of India's GDP (gross domestic product). Of this, critical categories such as petroleum products, pharmaceuticals, and electronics have been exempted. Moreover, we expect the Indian government to roll out targeted incentives to support affected industries. In the longer run, supply chains may realign. Hence, staying in cash is not advisable, and equities continue to remain the most compelling asset class for long-term wealth creation.

 

What are your expectations for second-quarter (Q2FY26) earnings? In which sectors do you find valuations still elevated?

 

India Inc. has seen five consecutive quarters of single-digit earnings growth. Based on company guidance and sectoral trends, we expect banking/NBFCs and IT, together accounting for nearly half of Nifty 50 earnings, to post subdued, single-digit growth in Q2FY26. This makes it unlikely that the rest of the index can offset the drag to deliver strong double-digit overall growth. The good news is that lending financials should start to see a recovery in the second half of this fiscal (H2FY26) as margin pressure stabilises. Combined with a likely pickup in urban consumption, supported by personal income tax measures and broader policy stimulus, earnings growth should return to double digits.

 

With India trailing other emerging and global markets, where do you see domestic equities ending this year?

 

India's equity markets have underperformed their emerging market peers this year despite having the strongest long-term fundamentals. The reason is simple: earnings growth has been stuck in single digits, while markets like China and South Korea, starting from depressed valuations, have begun to show signs of revival. This has prompted global allocators to re-balance towards those markets in the near term.

 

However, India's structural story remains unmatched. Demographics, policy continuity, and a resilient domestic demand base provide long-term comfort. In the medium term, underperformance may persist until corporate earnings move into double digits, something we anticipate in H2FY26.

 

What's an ideal asset allocation strategy as things stand?

 

We remain constructive on Indian equities, though returns ahead will likely moderate compared to the stellar performance of the past five years. Much of those outsized gains were driven by valuation re-rating and margin expansion, a lever that has now largely played out. Going forward, returns will be closely tied to the underlying pace of earnings growth.

 

Asset allocation, however, is not a one-size-fits-all framework. For investors with a medium-to-long-term horizon and moderate risk appetite, a diversified portfolio with equities as the anchor remains sensible, complemented by allocations to debt for stability and precious metals such as gold for hedging.

 

When do you expect foreign institutional investors (FIIs) to return to the Indian market?

 

Currently, FIIs are increasing their allocations to emerging economies other than India, where improving macro prospects and attractive starting valuations provide compelling near-term opportunities. While India remains the most attractive structural story, its relative earnings slowdown has dimmed its appeal temporarily.

 

We believe FII inflows will return once India's earnings growth shifts back to double digits, most likely in H2FY26. Until then, global capital may continue to chase undervalued opportunities elsewhere. However, over the medium-to-long run, India's growth trajectory will ensure it remains a favourable destination for foreign investment.

 

Considering current valuations and earnings, which sectors appear most attractive for investors?

 

The best risk-reward trade-offs in consumption, automobiles, and chemicals. These sectors are at the intersection of reasonable valuations and earnings recovery potential. Consumption and automobiles, in particular, have seen a dull phase, but we expect them to benefit from government measures on income tax and GST rationalisation in the months ahead. In short, investors should lean towards themes with improving earnings visibility rather than chasing sectors where valuations are running ahead of fundamentals.