Expert View: Large-cap stocks attractive; domestic sectors offer stability amid tariff uncertainty, says Gaurav Misra

Large-cap stocks remain a favourable investment avenue, with current valuations trailing both five-year and ten-year averages, according to Gaurav Misra, Head – Equity at Mirae Asset Investment Managers (India). In an interview with Livemint, Misra noted that domestically oriented sectors are likely to provide relative stability amid the heightened volatility triggered by trade tensions and global market disruptions.

Below are edited excerpts from the interview.

Q. How do you see Trump’s tariffs impacting the Indian equity market? Will this cause a long term bear phase?

A. Trump tariffs will cause volatility in the short term, as we are currently witnessing. Notwithstanding the ongoing volatility, the Indian economy and equity markets remain in a healthy state. The macroeconomy has been improving steadily, with growth coming in stronger quarter after quarter since the lows of Q2FY25.

Similarly, inflation has been trending below the RBI’s comfort range, and the outlook for both fiscal and current account deficits remains in line with expectations — particularly with crude prices expected to stay soft.

The markets, too, are in good shape, supported by the ongoing correction and recent FII selling. This is not a one-sided market, and valuations, especially for large-cap stocks, are currently reasonable.

However, prolonged US tariff uncertainty can open all sorts of downside possibilities for global growth and capital flows. Thus a longer term bear phase as a possibility cannot be ruled out.

Q. What sectors can be negatively impacted? Will this derail India Inc's earning recovery? What are your revised projections on earnings?

A. Sectors hit by tariffs, to start with, will have to navigate and negotiate their way with the end distribution and customer chains in the US. There will be some give and take. However, most sectors in the direct line of fire, demand is inelastic, ex. pharma generics. Also, the tariffs imposed on competing nations is even higher and that could lead to a better competitive position for Indian exporters. The sectors exposed to these dynamics include pharma, automobiles, chemicals, industrials and gems/jewelry.

The cut to earnings purely on account of tariffs is not estimated to be significant. The impact will eventually be through second order impact on global growth, trade, etc. At this stage that is not estimable because the duration and final levels of tariff are yet to be negotiated.

Q. In such a scenario, which pockets of the market do you believe where investors can find safety?

A. There will be opportunities across the spectrum in a market correction. There will be safety in domestic sectors but at a price valuation comfort would emerge in tariff impacted sectors on a bottom up basis. I think quality and strong business models, whichever industry they may be in, can better withstand periods of economic vulnerability. No doubt these names will be volatile like the rest of the market but such businesses will protect capital. So quality should be the first line of defence.

Q. How are you shifting your fund allocation in the wake of the brewing Trade War?

A. In the current period of volatility we are looking for ideas on a bottom up basis, agnostic of any sector bias. There is no large scale sectoral reallocation because of the ongoing situation.

Q. Do you expect an outperformance from largecaps this fiscal year? Is this the right time to buy them?

A. Large caps are a fine place to be. The category valuation is below both 5 year and 10 year averages. So far earnings growth estimates are in mid double digits for the next two years but this could change depending on the severity and duration of tariff wars and uncertainty.

If one is under allocated towards the large cap then these are times to gradually move towards optimal allocation. However, for investors with a long term investment horizon it would be appropriate to be adequately represented across all market capitalisations.

Q. Apart from the trade war, what other risks should investors be aware of?

A. The strength of earnings growth in the next few quarters will be a risk to watch out for. Sharp cuts can lead to further derating for the markets. On the other hand, Indian macros are robust and any policy which is inappropriate for the evolving circumstances is an additional risk.

At this stage corporate outlook and commentary on ability to navigate tariff uncertainty will be important for the markets. In fact, earnings outlook will be changing rapidly across some sectors, those facing tariffs but also other businesses that will indirectly be hurt by a global slowdown.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.it g