With the IT sector extending its decline through the month Ajay Argal, senior vice president and senior portfolio manager at Franklin Templeton, maintains a cautious stance on the sector due to uncertainties around AI. He calls this stage a transitioning phase.
On the other hand, Argal highlighted the attractive valuations and growth potential in banking sector.
Franklin Templeton had been underweight on the IT sector, and Argal continues to hold a cautious view. While the sector had rapid growth, Argal points out that financial year 2026 is unlikely to witness significant growth pick-up. The narrative around AI remains uncertain, and the reality lies somewhere in between the optimistic hype and pessimistic concerns, according to the portfolio manager.
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Additionally, the sector is undergoing a transition, requiring significant re-skilling, which could also lead to some loss of legacy business. Given these factors, Argal doesn't see any reason to go neutral or overweight on the sector, awaiting more clarity in the March quarter for potential earnings growth, he added.
Argal remains overweight on the banking sector, which offers the best combination of growth and valuation, according to him. While there's a slight slowdown in growth, he sees a manageable dip from 13-14% to 11-12% compared to other sectors.
Notably, banking asset quality remains benign, with microfinance, credit card, and unsecured loans accounting for just 10-15% of the sector's book. The rest of the banking industry shows minimal stress, and valuations are currently lower than their 5-10 year averages, making it an attractive investment opportunity.
Despite a recent market correction, Argal remains hopeful for upcoming quarters. For financial year 2025, he said the corporate profit growth was around 5-7% in the first nine months and it is expected to be 7-9% for the entire year.
However, for the markets to stabilise, double-digit growth in the March quarter will be necessary. Argal also noted that companies have been pushing back their growth recovery plans over the last two-three quarters, and it remains to be seen whether this trend will continue or if there will be better visibility in financial year 2026.
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