While valuation comfort exists in sectors like banks, pharma, IT, and infrastructure, Agrawal urges investors to be cautious of value traps.
According to him, growth visibility remains the key driver for premium valuations in the current market environment.
He also outlines key themes, sectoral opportunities, and the outlook on crude oil, FII flows, and monetary policy, offering a comprehensive roadmap for long-term investors. Edited Excerpts –
Q) Thanks for taking the time out. We closed May on a high not but witnessed some volatility in June – is it geopolitical concerns weighing on sentiment?
A) With the ceasefire between Israel-Iran in the wee hours of 24th Jun’25, situation is looking much better from equity market perspective. Crude oil prices have cooled off and fear of disruption in sea-route logistics has ebbed for the time being.
Nonetheless, the geopolitical tension on Ukraine-Russia is ongoing, however, markets have priced-in the impact of the same, long back.
We are hopeful that there will be calm on the geopolitical front and focus of street will shift back to a) US trade deals for which 9th July 2025 deadline is close by and b) incoming macro data (jobs, inflation, consumer sentiment, housing etc.) which will be the key deciding factor for likely rate cut in the ensuing US Fed meet in the month of July.
Q) As we are about to end 1H2025, what are your expectations or assumptions for the rest of the year?
A) 1HFY25 has witnessed significant volatility and equity markets have traded with negative bias for majority of the time in the backdrop of (a) uncertain business environment due to reciprocal tariffs implemented by US President Trump coupled with frequent flip-flops in terms of the trade deals, (b) muted earnings season on domestic front for Mar’25 ending qtr and (c) flare up in geo-political tension in various parts of the world, including India-Pakistan.
Going forward, for 2HFY25, we are constructive on the equity markets and are advocating “Buy on dips” bottom-up strategy to our clients with medium to long term investment horizon.
This optimism stems on the back of following factors (a) 100 bps cut in repo rate to 5.5% coupled with 100 bps cut in CRR to 3% in 4 tranches beginning Sep’25 and pursuant liquidity infusion of Rs 2.5 trillion in the banking system, (b) booster in the form of tax cut in the last Union Budget, (c) relaxation in norms by RBI for NBFC’s – All the 3 factors are likely to boost consumption over next 3-6 months with festive season kicking off from the month of Aug’25 (d) likely acceleration in the pace of corporate earnings growth to 2-digit growth beginning 2QFY26, (e ) revival in government & private sector capex amid the uncertain business environment, (f) progress on bilateral trade deals between US and other economies and its pursuant impact on the global economic growth, etc.
Q) Are there any new or existing themes that are likely to do well in 2H2025?
A) We expect select companies from the following themes to do well in 2HFY25: (a) rate sensitive sectors like NBFC, Auto OEMs (2W, Tractors), Auto Anc. (premiumisation, power train agnostic play, shift in portfolio towards EV, bearing, tyres, regulatory driven changes like compulsion of AC in CV cabin etc), real estate, bank (NIMs likely to come under pressure in 1QFY26 with significant improvement in exit FY26), real estate (b) structural steel tubes, (c) recycling, (d) railway wagons, (e ) power and power ancillary, (f) capital market (Wealth managers, AMCs, Brokers), (g) PEB, (h) workspace solution providers, (i) Hotels & Airline, (j) Hospitals, (k) Defence (have run-up significantly off late, long term bullish) etc. Commodities like metals and mining sector can be the dark horse, if outlook on the global growth changes significantly.
Q) Geopolitical concerns weighed on crude oil in the past few weeks. How do you see crude oil moving in the near future and what could be the possible impact on earnings and GDP growth?
A) Although we are not an expert on forecasting the crude oil price, as per various reports, crude oil supply is likely to outpace growth in the near term. In addition, non-OPEC+ producers are expected to increase the supply.
This coupled with increase adoption of alternate fuel vehicles, will put further pressure on the crude oil prices. The recent development of Oman likely to put income tax from 2028 on its top 1% of earners, hints that even gulf countries are reducing dependence on the crude oil revenue.
There may be short term volatility in the crude oil prices due to geo political tension in middle east but overall data suggests that crude oil prices are likely to remain benign in the medium-term.
On the domestic front, benign crude oil & its derivatives prices will keep inflation in check and is likely to give leeway to many sectors such as FMCG, airlines, tyres, lubricants, OMCs, etc. to expand margins and/or push volumes.
Q) In terms of valuation comfort – which sectors are on your radar?
A) Sectors such as Banks, Airline service providers, Insurance, Pharma, IT, Metals/Mining, Oil & Gas, Infra, Utilities, etc. are trading at reasonable valuations.
Kindly note, comfortable valuations should be construed as a buy signal, as Street is focused on bottom-up growth stories and is willing to pay relatively better valuations for the growth.
Sectors/companies which are likely to deliver sustainable 20-25% CAGR will continue to attract premium valuation. Cheaper valuation can be a value trap. Having said that, our domestic equity market is trading at a significant premium to MSCI EM index.
Q) How are FIIs looking at India amid falling interest rates globally?
A) Yes, agree with your assessment of falling interest rates globally underpinned by benign inflation outlook.
In such a scenario of falling interest rate and weaker dollar, we believe, global liquidity is bound to chase growth assets like emerging markets equities and India is likely to be one of the key beneficiaries of the same (both through long only India dedicated fund as well EMs dedicated fund).
Overall, with FII shareholding at decadal low in India, in the back of likely improvement in the global business environment, risk-on trade is likely to be back on table and domestic equity market has strong potential to attract FII flows.
Q) If someone plans to allocate say Rs 10 lakh (30-40 years) in 2H2025 – should they put fresh money to work? What is the ideal asset allocation?
A) Preferred asset allocation for youngster for 2HFY25 can be 20:80 Debt : Equity. For new equity market participants, flexicap MF is the best way to start the journey.
Experienced ones are recommended to curate well-diversified portfolio of 15 stocks across large (60%), mid (25%) and smallcap (15%).
Q) How is the rate trajectory looking from the RBI? Do you think the front-loaded 50 bps cut was enough to boost consumption?
A) During the last MPC policy meet, RBI changed its stance from accommodative to neutral. We expect long pause in terms of rate cuts.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
Source:https://economictimes.indiatimes.com/markets/expert-view/etmarkets-smart-talk-sbi-securities-cautions-against-value-traps-growth-visibility-key-to-attracting-premium-valuations/articleshow/122113139.cms