Where to find alpha in FY26? HDFC Securities’ Dhiraj Relli on market trends, trade war risks and more | Stock Market News

Expert view on markets: Dhiraj Relli, MD & CEO of HDFC Securities, believes the Indian stock market may outperform other global markets in the coming quarters. He expects the Indian economy to rebound strongly in the fourth quarter of the current financial year and for the next year. In an exclusive interview with Mint, HDFC Securities’ CEO shares his views on sectors that may generate alpha and the potential impact of Donald Trump’s tariff policies on sectors like IT and pharma. Here are edited excerpts of the interview:

Nifty closed FY25 with modest gains. What weighed on market performance?

FY25 is the first year of single-digit growth in Nifty earnings over the past five years, following an impressive compounded annual growth rate of over 20 per cent for the previous four years.

Strong flows from retail investors into equity markets resulted in stock re-ratings across the board in the first half of the year.

Despite modest earnings growth expectations, the Nifty index had soared by over 30 per cent by early October. However, lower-than-anticipated earnings starting Q3 and cautious remarks from various management teams prompted investors to adjust to the new reality.

Stock prices are slaves to earnings in the long run. As the reality of slower earnings became apparent, stocks started correcting.

Market sentiment took a hit amid heightened trade war concerns, particularly following US President Donald Trump’s announcement regarding reciprocal tariffs on countries that impose duties on US imports.

What is your outlook for the next financial year? What will be the key market drivers in the coming year?

Companies with strong earnings visibility should experience significant rebounds as market confidence returns.

While midcap indices have declined 20-22 per cent from their highs, individual stocks have weathered much deeper corrections of 25-40 per cent, creating genuinely attractive valuation opportunities across the market landscape.

Historically, mid and small-cap stocks deliver higher returns, but this potential comes with inherently increased risk and volatility.

These segments tend to amplify both market upswings and downturns compared to their large-cap counterparts.

Investors must adhere to a clearly defined asset allocation strategy aligned with their personal risk tolerance and return objectives.

This requires regular portfolio reviews, a deepened understanding of equity market dynamics, continuous development of investing skills, and rational expectations about potential outcomes.

When allocating capital to any particular asset class or market segment, thorough due diligence becomes essential for long-term success.

Even within identical sectors, individual stock performance can diverge dramatically over time.

This phenomenon underscores why fundamental analysis and careful security selection often prove more valuable than broad sector-based allocation approaches.

The ability to identify quality companies within sectors often separates successful investors from the crowd.

The most prudent strategy involves identifying companies that maintain consistent earnings trajectories while offering a margin of safety due to recent price corrections.

Although investors should remain vigilant regarding global geopolitical developments, the risk-reward profile appears increasingly favourable moving forward, barring any significant adverse international events.

This balanced approach—combining selective investment in fundamentally sound companies with an ongoing awareness of external factors—creates a framework for potentially capitalising on current market conditions while managing downside risk.

What led to India Inc.’s weak earnings over the past three quarters? Do you see signs of improvement?

Ruling dispensation’s pre-occupation with elections and curb on government spending due to code-of-conduct restrictions led to a slowdown in government expenditure in the first half of the year.

Lacklustre earnings, significant selling by foreign portfolio investors (FPIs), ongoing geopolitical tensions, a strong dollar, consecutive Chinese stimulus announcements, and uncertainties on account of US elections fueled volatility in the last few quarters.

We may see consolidation for a few months before scaling higher levels.

Overall, the street expects Nifty earnings to grow between 12-15 per cent each in FY26 and FY27.

On that basis, Indices, as well as mid and small-cap stocks post recent sharp correction, have become attractive.

India’s long-term structural growth narrative remains compelling, and the recent sharp market correction has transformed previously stretched valuations into more reasonable territory.

While diversification into international markets may offer some portfolio benefits, we anticipate that India will likely outperform other global markets in the coming quarters as its fundamental strengths become increasingly apparent against the backdrop of global uncertainty.

What is your outlook on domestic growth and inflation for the next fiscal year?

We expect economic growth to rebound strongly in the fourth quarter of the current financial year and for the next year due to boost in rural income due to better rains this year, corporate fundraising pointing to a lift in private capex and pick-up in fiscal spending from the government to meet budgeted expenditures.

With the US Fed signalling two rate cuts this year and the RBI expected to lower rates by 75–100 bps, will this be enough to revive animal spirits?

Yes, the anticipated rate cuts by the US Federal Reserve and the Reserve Bank of India represent a promising catalyst for economic revival.

RBI’s monetary policy moves are likely to inject much-needed liquidity and reduce borrowing costs, potentially reigniting investor confidence and corporate investment.

These monetary interventions could indeed help revive the ‘animal spirits’ by creating a more conducive environment for economic expansion and risk-taking.

Which sectors are best positioned to generate alpha in the next market uptrend?

India is one of the world’s fastest-growing economies with a large, young population.

Rising prosperity is driving demand for financial services. Government reforms and digital banking initiatives are increasing sector efficiency and accessibility, expanding the customer base.

A strong focus on collections, overall improvement in asset quality, write-offs and resolutions via the IBC has helped banks strengthen their loan books.

The financial sector currently presents attractive valuations with promising growth potential. Emerging trends in financial inclusion and technological adoption are transforming rural and underserved markets, creating new opportunities for expansion.

As the Reserve Bank of India (RBI) works to enhance system liquidity and reduce interest rates, these efforts are expected to stimulate credit demand and support sector growth.

The combination of reasonable valuations and strategic market developments makes this sector particularly compelling for investors.

How should investors approach export-driven sectors like IT and pharma amid Trump’s tariff uncertainties?

From an Indian investor’s perspective, Trump’s reciprocal tariffs, set to take effect on April 2, 2025, could significantly influence various sectors.

IT giants derive 50-60 per cent of their revenue from the US. Tariffs might not directly hit services, but Indian investors should closely monitor automobiles, pharmaceuticals, and IT for potential downside risks.

India exported $8.7 billion worth of drugs to the US in 2023-24, holding a 35 per cent share of the US generic market.

Trump has hinted at tariffs on pharmaceuticals (potentially 25 per cent), which could disrupt this key sector.

India’s cost advantage over competitors like China (facing 20 per cent tariffs) might soften the blow.

Negotiations to lower India’s tariffs on US drug formulations could also mitigate retaliatory measures.

Secondary effects like reduced US corporate spending amid trade uncertainty could dent demand.

Textiles are among India’s top exports to the US, with significant volumes at stake.

Tariff hikes could affect price-sensitive segments like garments. Higher duties might reduce competitiveness against rivals like Vietnam or Bangladesh.

The US is a major market for Indian auto parts exports, valued at $6.69 billion in 2023-24. Trump has highlighted India’s high tariffs (over 100 per cent on US auto imports) and signalled potential reciprocal tariffs, possibly around 25 per cent, on auto-related goods.

The US already imposes 25 per cent tariffs on Indian steel and aluminium (under 2 per cent of exports), and reciprocal tariffs could target related products. India’s steel exports to the US are modest but part of a $5 billion impacted pool.

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Disclaimer: This interview is for educational purposes only. The views and recommendations above are those of the expert, not Mint. We advise investors to check with certified experts before making any investment decisions, as market conditions can change rapidly, and circumstances may vary.