India's valuation edge over China and other EMs may face pressure

We believe that the earning downgrades might continue at a moderate pace for a quarter or so...Rahul Singh CIO, equities, Tata Asset Management

- Dipti Sharma

Apart from the dollar's strength and the "US exceptionalism" that has impacted all emerging market flows, the revival of positive sentiment around China's technology sector (post Deep Seek and softening of the Chinese government's stance towards the private sector) can impact India's valuation premium over China and other emerging markets, said Rahul Singh, CIO, equities, Tata Asset Management. "It is therefore even more important for the earnings growth recovery to kick-in in FY26," he added.

Singh is of the opinion that earnings downgrades might continue at a moderate pace for a quarter or so before the stimulus in the Budget and monetary policy easing start to take effect. Edited excerpts:

With the Nifty 50 and Sensex having corrected around 12% and 13%, respectively, from their record highs, while Nifty Smallcap 250 is down 21% and Nifty Midcap 100 is 17% away from their peaks; do you see more pain ahead? For how long?

Markets are likely to react more to corporate earnings from here on rather than macros (dollar strength, tariffs, inflation) as Nifty 50 valuations are now only at a small premium compared to the long-term average. We could therefore be looking ahead at a period of sector-agnostic and stock-specific returns for the next 12-18 months where index movements will become secondary.

Despite the recent correction in broader markets, mid-cap and small-cap stocks still trade at meaningful valuation premiums. Large caps, therefore, have a better risk-reward with lesser chances of earnings disappointments even as valuations (especially in small caps) have corrected significantly.

Downgrades are far outpacing upgrades. How long do you expect this to continue? When do you expect corporate earnings to recover?