Earnings growth might remain sluggish for next two years, Old Bridge AMC's Kenneth Andrade

The recent goods and services tax (GST) rate cuts and income tax relief prior to that will add some weight to an otherwise sluggish consumer economy, going into the festive season, said Andrade, associate director at Old Bridge Asset Management. But on their own, these are not enough to move the earnings needle in a way that justifies current market valuations, he said.

Andrade also finds that new issues hitting the market are richly priced.

Edited excerpts:

The benchmark Nifty 50 and Nifty Midcap 150 are around 3-4% below their life highs as of last September. Do you think income tax relief, RBI rate cut and GST cut will boost demand and corporate earnings to take us to fresh highs?

On the international front, the worst seems to be already in place. Our sense is that from here on, things will limp back to normalcy. It is unlikely to go back to its earlier state, but will be much better than where the Indian export economy is currently placed. Domestically, there has been some initiative to kickstart the economy through a consumption cycle, which will add some weight to an otherwise sluggish consumer economy, especially going into the festive season. This, in our opinion, will help keep the trajectory of earnings growth at mid to high single digit, which has been what corporate India has witnessed over the course of the last couple of years.

What the market expects? A change in sentiment and a higher growth rate. The latter is where the challenge is and the single-digit earnings growth may not be able to propel the indices significantly higher. Even if we do make fresh highs, the valuations will keep any significant upside in check.

From an earnings perspective in Q1 FY26, mid-caps saw an improvement at topline and Ebitda level while still lagging large-caps. Is this better-than-expected recovery of both large- and mid-caps likely to sustain in the quarters ahead due to the domestic drivers cited above?

We do expect the market breadth to narrow and this is based on our expectations of sluggish earnings into the next two years. We need to focus on the expansion of corporate India's capex cycle, which has been elusive. The near-term macro drivers will not be the main reason for earnings to pick up. It has to be economic and private sector capital expenditure. Our view is that this remains a significantly stockpicker's market. Large trends will be both extremely difficult to catch and will be short-lived.

Downward revisions to earnings continued in Q1 despite margin tailwinds giving a push to earnings. Aggregate FY26 profit estimates for the top 200 well-covered companies by market-cap have been trimmed with projected earnings growth at 11.6% as of September from 12.1% as of June end.

Corporate India is already sitting at an all-time high on margins. This can't really be a structural driver for consistent earnings growth in the medium term. We need to see both a volume pickup as well as pricing power/inflation.

Foreign portfolio investor (FPI) selling has continued despite better-than-expected GDP growth of 7.8% in Q1. Do you feel the tariff issue and/or valuations are still the biggest overhang to markets breaking out after a year of negative returns?

The growth numbers are largely being valued at current market valuations. This continues to be the biggest overhang for FPI selling. Along with this, other markets have been cheaper and there is momentum in other asset classes and the US indices.

Which sectors do you like and which will you avoid, and why?

We don't have too many biases at this point. We just need to concentrate on allocating capital at logical valuations. This will help lower the portfolio's volatility while meeting our return expectations, which should be broadly in line with nominal GDP growth.

Retail exposure to stocks has gone up manifold through the mutual fund route, giving exits to FPIs at attractive valuations. Do you worry they will be left holding the can in the event of a global slowdown induced by trade tensions or any other event? As a fund house, you're sitting on 11% cash as of August-end against industry-wide average of 5%, which implies caution.

Cash is never a strategy for us. If Old Bridge Focused Fund is holding 11% cash, we have a corresponding 89% invested in equity; we spend more time on that. We find liquidity very hard to predict, but in the context of what's happening, it's good for the investor as well as the industry.

Are you seeing the possibility of one or two rate cuts by the RBI, especially if inflation picks up from the first quarter of next year, per RBI?

We don't think the economy will be inflationary in the near term.

What's your view on alternate assets like gold and crypto?

If we continue to have a deflationary currency, precious metals will act as a great hedge. Apart from that, I have little opinion on alternate assets.

Do exits at the promoter level through block and bulk deals worry you?

I worry about the pricing of the exits. Most IPOs are very richly priced, which takes away most of the near-to-mid-term gains. For a strange reason, primary market valuations are sometimes higher than secondary market valuations. Overall, this supply of stock creates a great balance to all the liquidity coming into the markets through direct investors and mutual funds.