Pankaj Murarka, CIO, Renaissance Investment Managers, says tariffs may not significantly hinder the overall economy. While consumption will be insulated due to domestic focus, economic momentum is slowing post-Covid. Moderate growth and slower earnings are present. High growth exists in specific market areas. The internet sector shows 25-30% growth. Some internet companies can sustain growth at double or triple the nominal GDP growth.
It has been a show of resilience for the past two days at least. It seems like all the negative was already done with. All through July, we have had a consistent FII selling. The index alone has lost about 900 odd points or so. Do you think the worst is behind us?
Pankaj Murarka: For the time being, it looks like some of this bad news is in the price. Directionally, we are still very much in a bull market. I see any fall as a correction in the larger bull market. I still think that the index can do about 12-13% CAGR returns this year and probably over the next two to three years.
In that context, probably first quarter numbers have been pretty much okay. The good thing is that we have arrested the earnings downgrade cycle and now incrementally earnings have stabilised. Hopefully from the second half of the year, we should see improvement in earnings going ahead. A fair bit of monetary and fiscal stimulus has been injected into the economy in the budget through tax cuts and then by RBI with a front loading of 50 basis points rate cut. Combining all of that, I am looking forward to a much better economy in the second half of the year and an uplift in earnings growth. I would think that the market should find a floor somewhere around these levels over the next few weeks.
Coming to earnings, what is going to lead the recovery first and would it be more consumer facing sectors because they also are working with a low base?
Pankaj Murarka: True, but before that let me just put the aggregate picture in play. Last year, we had probably one of the slowest earnings growth. In the last five years, post Covid at 5% for Nifty 50 index and the earnings growth for top 200 companies was not very different at about 7 odd percent. So, it was probably one of the slowest earnings growth in the last five years.
While we will see some improvement in earnings this year, I must concede that earnings growth this year will not be very significant. If we can do a low double digit, around 10% growth on the Nifty index for Nifty index companies, that will not be a bad outcome. Probably next year is when we get into mid-teens kind of earnings growth. So, it will be a gradual recovery cycle both on the economy and earnings, and that is the one point I wanted to say. 
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Obviously, you are right that there is a skew in terms of earnings. I still think that financials are coming off a low base and given that the margins have been impacted in the first quarter and probably the first half because of the front load rate cuts by the RBI, in the second half of the year we probably would see earnings recovery in financials and so that should lead. I agree with you that we are probably coming out of almost two-and-a-half years of consumer slowdown, and so probably in the second half of the year, we should see an improvement in earnings trajectory for consumers as well.But the bigger concern is what happens with respect to the tariff and in this uncertain time, have you spotted any sectors which you believe will be insulated from the tariff tantrum?
Pankaj Murarka: Yes, it is a pretty unwelcome move in terms of the tariffs that we will end up facing. But I still think that those are transitory and eventually these are all bargaining tactics. Eventually India and the US will have a deal in place. Now whether that happens in 8 weeks or 12 is anybody’s guess. I still think that the long-term effective tariffs on India will be much lower than what it has been proposed. Having said that, tariffs will have some impact especially on highly export dependent sectors like textiles, gems and jewelleries and few others.
On the aggregate growth basis, I still think the aggregate negative headwind that will emerge from tariffs for the economy is still moderate and manageable. Probably a 30-40 basis points hit on the aggregate GDP and despite tariff headwinds, India can still do a 6.2-6.3% growth this year which is similar to what we did last year at 6.5%.
At the aggregate level, I still think tariffs are not a big headwind for the economy as a whole. Yes, consumption will be one of those pockets given that complete domestic orientation will remain insulated from it. All of us have to consider that there is a downward reset in terms of economic momentum from what we saw post Covid. So in an environment where economic growth is moderate and earnings have slowed down, high growth can be seen in some pockets of markets. My favourite sector is the internet sector and that is the sector where we are seeing growth still at 25-30% and many companies in that sector can sustain growth which can be 2x or 3x of the underlying nominal GDP growth. So, it probably remains one of my preferred places to find high growth companies in an economy and market where there is an earnings slowdown.