Geopolitical risks remain, but domestic fundamentals offer insulation: Ashwini Agarwal

"Hopefully, a capex-led recovery that is what we are all hoping to see. So, there is nothing to complain about. Hopefully, the Middle East disturbance also simmers down. We will see how that unfolds because it seems, we have to take each day as it comes. But in the domestic context, barring the valuations which are quite stretched, not much to complain about," says Ashwini Agarwal, Demeter Advisors.

With the markets at an all-time high, there should have been like a garmahat in your good morning.
Ashwini Agarwal: No, I think markets are nothing to complain about. I mean, valuations are what they are, but flows and the expectations from growth perspective that lower interest rates and government expenditure should lift growth as the year rolls around, those are positives for the market.

And like your colleague was pointing out earlier, KEC received some orders, another railway company received orders, I think that is the nature of the beast we are dealing with.

Hopefully, a capex-led recovery that is what we are all hoping to see. So, there is nothing to complain about. Hopefully, the Middle East disturbance also simmers down. We will see how that unfolds because it seems, we have to take each day as it comes. But in the domestic context, barring the valuations which are quite stretched, not much to complain about.

While we may talk about valuations which all of us are talking about it, but it is a two-year-old story that valuations mehnge hai, yet markets it keeps on going higher.
Ashwini Agarwal: See, we are in a closed box environment. I mean, bulk of Indian savings cannot leave India. What has been established beyond doubt to the retail investor over the last 20-25 years is that equities give you better return than bank deposits both on a pre-tax basis and even more on a post-tax basis. So, shift of savings from bank deposits to equities is a continuing trend. Recent RBI data is also pointing to a shift in that direction. And this is very similar to what has happened in the US, for example, when the 401K shift happened sometime in the 80s and 90s. So, that is what is driving up the market. I mean, if we were a capital open economy and if the investors had the freedom to invest anywhere in the world, I do not think the valuations would be as rich as they are, but this is how it is and you have to take it as is.

For markets to go higher from here, we need a trigger and we need a surprise. What could be that positive surprise? Could it be earnings? Could it be anything else?
Ashwini Agarwal: So, there is a lot of scepticism around growth and while the RBI has done a reasonable amount of heavy lifting by cutting the CRR and reducing rates and the government continues to push ahead with investments in railways and infrastructure and what have you, the private sector has not responded and that is the positive surprise that can happen since you are asking me for a positive surprise. I am not sure whether it will happen or not. I am hoping.

So, I use the word hope which does not have a lot of certainty behind it. But that would be a real surprise and then you could potentially get into a situation where your earnings trajectory improves from 10% to 12% for Nifty, for example, for fiscal 26 that everybody is talking about to maybe 15-17% for the next three years.

Now, if that happens, then valuations can remain expensive for longer because then everybody starts focusing on growth, saying that well, India is growing much faster than anywhere else in the world, there are no major macroeconomic imbalances just yet, so let the party carry on. I mean, that is the narrative that can evolve if you were to look for a positive surprise.

So, financialization of saving is driving the Indian markets higher, that is your take, but how should one take advantage of that in terms of the stock picking because, of late, we have seen all these AMCs, rather some of these brokerage companies on the stock price movement, they have been doing well. But do you believe at this price point the valuations are fairly placed or what is your take how can one take benefit out of this?
Ashwini Agarwal: The capital market plays are already reasonably well priced. Now, of course, they will give you that 12-15% return which is in line with the growth in aggregate market returns because their business will grow by at least that much if not more. But what I would rather do is look for beneficiaries of a low-interest rate regime. The NBFC stand out in particular because their lending costs are somewhat sticky whereas their borrowing costs are likely to fall.

I mean, just this morning I was reading a newspaper article which spoke about the rush into low-grade bonds or triple B bonds or A minus type of bonds with investors looking for yields. Now, if that starts to happen, then you can see an improvement in the spreads for the NBFC, so that is one area that I would look at. And in a similar vein, I would look at some of the smaller banks.

Now banks have a kind of a dual-edged sword in the sense that their asset book gets repriced faster than their liabilities book in the short run. But I think improvement in net interest income will come from a lower CRR and it will also come from a better loan growth. So, improvement in net interest income come will come from these two factors, from loan growth as well as from lower CRR, so that to me is something that can hold some surprise.

And valuations in this space whether it is banks and NBFCs are still quite reasonable, so this looks to be an area where things are looking good to me and that is how one can play it, at least the liquidity part of it from an equities’ perspective.

Banking and financials, they have been the flavour of the season of late, other than this if you adopt a bottom-up approach, what else is looking attractive?
Ashwini Agarwal: The healthcare sector continues to look quite attractive. This is one long-term story that is evolving in India. Healthcare costs are rising. So, whether it is health insurance or whether it is hospitals or healthcare service providers like diagnostics, etc, these will continue to grow at a reasonable rate.

Now, in some cases valuations are expensive, in other cases they are not. So, on a bottom-up basis this is an area where one can hunt for some ideas. There are select opportunities in manufacturing as well in various areas whether it is related to exports or whether it is related to domestic economy, I think defence, railways are quite pricey but some of the core engineering companies are still looking alright.

There are domestic services plays outside of financial services where one can look at. Now, I have to say that across the board valuations are challenging. So, it is not that there are any screaming buys out there, but relative to growth, you might find a few ideas here and there, but it is becoming more and more difficult to find very appealing bottom-up ideas.