5 Key Sectors Set to Boost FY26 Earnings Growth, According to Portfolio Manager
Portfolio Manager Ashwini Shami of OmniScience Capital highlights banking, financial services, defence, capital goods, and power sectors as the key drivers of earnings growth in FY26. The focus on infrastructure and defence execution post-Operation Sindoor is expected to propel these sectors.
BankingFinancial ServicesDefenceInfrastructureEpcReal Estate NewsJun 01, 2025
In an interview with Moneycontrol, Shami discussed the major triggers for the market that can drive a rally in the coming months. Inbound FII (Foreign Institutional Investor) flows, low inflation numbers, interest rate cuts, and a good monsoon are some of the positive factors that could help sustain the rally. The portfolio manager also anticipates an improvement in the GDP growth outlook in FY26, driven by higher consumption resulting from tax and interest rate cuts. Government capex and global supply chain reorientations, triggered by trade tensions, are expected to further boost domestic manufacturing and exports.
However, there are risks that could dampen market sentiment in the coming quarters. Geopolitical tensions, Trump’s tariff policies, or a spike in inflation could negatively impact the markets. While FIIs have been net buyers over the past three months (from March to May 2025), US economy-specific factors could reverse this trend. High valuations in certain segments, if not supported by earnings growth, might trigger a reshuffling of assets across sectors or asset classes.
When asked about the RBI's (Reserve Bank of India) potential actions in the June meeting, Shami stated that growth and inflation forecasts for FY26 are unlikely to change. However, it is almost certain that there will be a 25 basis points (bps) rate cut in the June meeting, as inflation has consistently remained below the RBI’s target of 4 percent. This will be the third rate cut of the year and is expected to be followed by another cut in August. The total 100 bps rate cut in 2025, along with the impact of tax reductions, is anticipated to boost demand and further support the capex cycle this year.
After reviewing the March quarter earnings, Shami identified banking and financial services, defence, capital goods, power, and EPC sectors as likely contributors to FY26 earnings. The portfolio manager expects capital investment in infrastructure to regain momentum. The defence sector is likely to see a significant focus on order book execution post-Operation Sindoor, which will boost topline growth for defence companies. Power, EPC, and select infrastructure companies could see strong growth as the focus shifts back to execution.
Regarding exposure to the consumption space, Shami noted that their exposure is primarily through banks and specific financial services companies, such as housing finance firms. The portfolio manager continues to avoid FMCG (Fast-Moving Consumer Goods) and consumer durables due to either growth concerns or extreme overvaluation.
Shami also addressed concerns about the tariff factor. While several bilateral trade agreements have been signed by the US following the 'Liberation Day' tariff announcements and the subsequent pause, the 90-day pause is set to expire in July and may trigger fresh uncertainties.
When asked if this is the best time to invest in the banking sector, Shami quoted Warren Buffett, saying that pessimism is your friend and euphoria is the enemy in investing. There is excessive pessimism regarding issues such as NIM (net interest margin) compression and the MFI (microfinance institutions) loan book for most banks. With limited impact on the long-term value of banks, Shami believes this pessimism has created significant mispricing, as reflected in the single-digit (7.3x) price-to-earnings ratio for the PSB (Public Sector Banks) index.
Frequently Asked Questions
What sectors are expected to boost FY26 earnings growth according to Ashwini Shami?
According to Ashwini Shami, the key sectors expected to boost FY26 earnings growth are banking and financial services, defence, capital goods, power, and EPC (Engineering, Procurement, and Construction).
What are the major triggers for a market rally in the coming months?
The major triggers for a market rally include inbound FII flows, low inflation numbers, interest rate cuts, and a good monsoon. These factors are expected to improve the GDP growth outlook and boost domestic manufacturing and exports.
What risks could dampen market sentiment in the coming quarters?
Risks that could dampen market sentiment include geopolitical tensions, Trump’s tariff policies, a spike in inflation, and high valuations in certain segments not supported by earnings growth.
What is the expected action by the RBI in the June meeting?
It is almost certain that the RBI will implement a 25 basis points rate cut in the June meeting, as inflation has consistently remained below the target of 4 percent. This is expected to be followed by another cut in August.
Why is Ashwini Shami optimistic about investing in the banking sector despite current pessimism?
Ashwini Shami believes that the current pessimism regarding issues such as NIM compression and MFI loan books has created significant mispricing, making it a good time to invest in the banking sector. The single-digit price-to-earnings ratio for the PSB index reflects this opportunity.
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