I am looking at this trade setup for Indian markets and for US markets. While the Indian market is holding on nicely, US markets are where the real strength is, despite all the tariff concerns, debt concerns and also concerns centred around immigration laws. The US markets have made a remarkable comeback. Why is that?
Dhiraj Agarwal: I read a very interesting article in last weekend’s Economist. The new buzzword apparently in the market is nothing ever happens. So, the article basically says that most of the large, mega, macro, and geopolitical events have absolutely had no impact on the markets and the markets are just focused on bottom-up stories, on earnings and on funds flow at this point of time.
We have seen this before. We have seen many times before that in one phase of the market, it tends to ignore all negative macro or geopolitical news, and it continues for a while more. Maybe we are in that phase where markets are ignoring some of the negatives and this will eventually come to bite or on a more optimistic note, maybe the negatives will wash themselves away at some point of time.
Even in the Indian context, the March quarter earnings have been very weak. In fact, the last four quarters’ earnings have been weak but the market has bounced back, just a shade away from all-time highs because it is looking forward. We are expecting that in the second half, there will be a strong recovery going into FY27, although the first half looks like a little bit of a washout. At this point of time, investors are taking a longer-term view and ignoring the short-term stress.
What is a prudent strategy right now when earnings are not there? The truth is I don’t know whether it will come back or not. Today, they are not there and markets have gone up. Should one exercise caution or wait for a better tomorrow?
Dhiraj Agarwal: This question has two answers. One is at the index level and one is at the stock or the company level. At the index level, one should be slightly cautious. Whether the upside is there in large, small or momentum stocks, one should be cautious. But at the company level, the market is seeing a huge amount of polarisation in performance as well as stock prices, which in turn is driven by polarisation in earnings.
Let us say, the Nifty earnings last year was about 7% YoY, but there are a bunch of companies growing at 15-20% and there are a bunch of companies not able to grow or even decline in earnings. This is a great stock pickers’ market. One can find ideas and make a portfolio of companies which have market beating and sector beating earnings growth and that space is doing well and may continue to do well.We have a bit of an interesting patch where flows are strong and supply is also strong. Where will it settle? Will supplies start reducing or will demand start coming back?
Dhiraj Agarwal: Liquidity flows on both sides are impossible to predict. So, it is a million dollar question. But at this point of time, if the market continues to be buoyant the way it is, I will not be surprised if the mutual fund inflows, which have dropped down from Rs 40,000-50,000 crore per month average down to about Rs 20,000-25,000 crore right now, climb back to Rs 40,000-45,000 crore. The supply is there. But on an aggregate level, this year the supply will be lesser than what it was last year. Last year was massive. If in FY25, give or take, you had 60-65 million of total supply, it will be a bit lesser this year.What could be called reasonable and fairly priced, where earnings will surprise us? What is that criteria or group for you?
Dhiraj Agarwal: I typically do not comment on stocks, but what is happening at this point of time is that within every single sector, we are finding a few companies which are earnings outliers and few companies which are not able to grow very strongly. I will just illustrate that with an example. In IT, for example, there are a bunch of second liners. They are no longer midcaps, I think they are largecap – second liners which are delivering strong earnings growth. These are companies like Persistent, Coforge, etc. The stocks have done significantly better than the mega caps like Infosys and TCS where earnings growth are now sub-10%.
We are seeing that in banking as well, where a massive rotation is happening. The last three or four years belong to PSU banks while the private banks underperformed. We are seeing a massive rotation this year back into private banks and PSU banks are facing slight struggle. The macro thesis for that is whenever the economy slows down, whenever credit growth slows down, private banks tend to do better on business metrics, on valuations, and on stock prices compared to PSU banks. Now, PSU banks tend to do a lot better when the economy is very strong and it is easy to do business. So, we are seeing a lot of dispersion in fundamental performance and stock price performance within the sector and I do not think that will change for the next year or two.
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