Expect moderate returns this year as macro headwinds mount: SBI Pension Fund CIO

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A continuation of the conflict in West Asia could lead to further downgrades in corporate earnings, Sandeep Pandey, chief investment officer at SBI Pension Fund, told Mint in an interview. As companies face mounting margin pressures, they are likely to pass higher costs onto consumers, creating an inflationary environment, Pandey said. He added that currency volatility is another major risk, noting that if global interest rates rise faster than India's, it could put additional pressure on the rupee.

Given these compounding macro headwinds and stretched corporate margins, Pandey warns investors that overall return expectations from the stock market should remain moderate for the current financial year.

Here are some edited excerpts from the interview:

The back-and-forth on the ceasefire will increase volatility in the near term. If this continues in the second half of the year, it could affect both growth and inflation. For India, which is heavily dependent on imported crude, it means high input costs at the producer level. This could lead to meaningful downgrades in earnings, significantly impacting corporate margins. To protect against this, companies will pass on the increased costs to customers, and the resulting higher inflation may dent consumer sentiment and impact overall demand.

Companies have already been dealing with cost pressures from the war. So far, they have managed the situation through existing inventory and passing on some of the higher costs. This pressure is highly visible in the growing wedge between wholesale price inflation (WPI) and consumer price inflation (CPI).

However, if geopolitical tensions persist, there could be some downside risk to earnings ahead. For the June quarter, the consensus expectation points to high single-digit earnings-per-share (EPS) growth for the Nifty 50, largely dragged down by the oil & gas sector, followed by stronger growth in the second half of FY27. It remains to be seen if companies can manage double-digit earnings growth for the full financial year.

Valuations have corrected and are now below their 10-year average, which offers some comfort. So, if earnings continue to grow in the double digits and valuations stay reasonable, the broader outlook remains supportive. That said, I wouldn't expect very strong performance, and overall return expectations from the market should remain moderate for the financial year.

Corporate India's margins are already close to multi-year highs after expanding over the past two to three years, so future earnings growth will likely have to come from revenue growth. The key drivers of this are domestic consumption and exports. The recent trade deals should help increase exports, which will help the manufacturing sector. But given the geopolitical uncertainty, the focus will be more on consumption. The 8th Pay Commission could support spending. We should be watchful of consumption challenges, particularly in rural demand in case of El-Niño-related events.

Markets don't always behave rationally. Themes can remain overvalued or undervalued for extended periods. Markets like Korea and Taiwan have delivered exceptional returns over the past six months, with companies like Samsung and SK Hynix seeing very strong gains. So, while a large part of the AI theme has already played out, it's difficult to say whether it has completely peaked.

For India, this could actually be beneficial. If global investors start diversifying away from AI-driven markets towards economies supported by domestic consumption, India could emerge as one of the key beneficiaries.

Foreign institutional investor (FII) outflows have eased and some inflows have returned, including into debt. Investors appear to be looking at India again, but it's too early to conclude that the reversal in flows is firmly in place.

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