India in “peak pessimism” phase, but cyclical recovery may lift earnings: Arbind Maheswari

Speaking on ET Now, Maheswari noted that earnings estimates have been steadily revised downward, with growth expectations now cut to around 8.5%, marking what could be the third consecutive year of single-digit corporate profit expansion.

“Since then, we have cut down earnings estimates back to about 8.5%. So, this is the third year in a row where we expect earnings to give you single-digit growth. But that said, I think there is pain from the cycle and as this fades, I do not think this is a permanent thing. As the West Asia crisis fades, as oil prices cool off, as the supply chain bottlenecks that India is faced with start to ease, you already have headline growth and then you will start to have bottom line growth as well,” Maheswari said.

Valuations remain elevated, but narrative shifts with growth visibility

On India’s relatively resilient valuation multiples despite muted performance versus peers, Maheswari highlighted that premium valuations have long been a sticking point for global investors, but are largely sustained only when growth visibility improves.

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“Look the interesting thing is valuation has always been an overhang for the Indian markets for global investors through the up and the down. It has remained a problem for any bottom-up investor looking at India. People are willing to pay the premium if they start to see growth come back. The problem is when you have those valuation multiples but with low earnings growth and low earnings growth visibility is where the challenge is then for people who are looking at the markets to invest in.”

So, if you solve for growth and earnings growth, people are okay paying the kind of multiple that India has seen historically. And any which way with the kind of selling that we have seen both from foreigners, from private equity investors, from founders selling stakes, the valuation compression has naturally occurred because if you look at the markets at the very least have time corrected despite economic growth and earnings growth in the single digits, the markets have gone nowhere. So, the valuation correction has already happened and if you start to look at dollar term, then it has corrected even more,” he added.

“Peak pessimism” visible; modest returns still possible
Addressing near-term market direction, Maheswari acknowledged ongoing macro uncertainty but suggested sentiment may be close to its lowest point.

“So, we cannot rule out the here and now issues. They are very real. So, I would not be foolhardy and say that it is all rosy from here on, but I would say one thing there definitely is peak pessimism in the markets and there is definitely a lot of questions being raised around pain which seems more cyclical in nature and people are starting to identify with some of these as permanent, it is not going to be, India always surprises both the optimists and the pessimists alike and I think at this point given how pessimistic this sentiment has become, we will not need a whole lot to be able to start delivering returns. In fact, from where we are at this point in the markets, we feel like we could deliver 10% index returns till the end of the year,” he said.

Foreign investors still engaged despite muted returns
Maheswari also noted that foreign investor participation remains steady, even if performance has not been compelling in recent years, suggesting India still holds structural appeal in global portfolios.

“There is definitely a shift in terms of the focus that where is the Indian economy starting to see green shoots, what are some of the areas which are driving the next phase of growth? And if you look at what is happening around the world, you can clearly see growth coming through in energy security and then energy security means different alternatives, renewables, green hydrogen, and different forms of power. There is defence which is kicking in. India has been an infrastructure starved country and that is going to be continuously invested in. So, these are areas where people are looking for ideas,” he said.

AI reshaping global flows, India yet to fully participate
On artificial intelligence and global sector rotation, Maheswari observed that capital flows remain heavily concentrated in technology, particularly AI-linked trades, which is influencing sentiment across emerging markets.

“So, the market is globally is attracting flow towards only one story, at the front and centre of it is tech is AI and it is hard to pull away from the fact with near-term vision. And now whether it is a bubble, it is not a bubble, how long can this last is anybody’s guess but that is not just an India problem, it is a problem for across markets. And even within markets it is within the sectors as well. If you look at how narrow the rallies have been even for markets which are at all-time highs whether it is Korea, Taiwan now or the US, the market rally has been led by only a handful of stocks. If you look at the median returns, it is still pretty pedantic. So, it is not just an India problem is one,” he said.

“When foreign investors are looking for ideas in India, at the back of the mind they know that the AI trade may not last forever and when that fades, they will have to look at ideas and we think there is a pullback at some point that will come, but they will have to get ready for what next and then India will definitely be a market that will start to attract flows once that AI trade fades,” he added.