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India's equity market could continue to find support from healthy corporate earnings and attractive valuations, particularly in the banking sector, according to Ashwini Agarwal, Founder & Partner at Demeter Advisors.
While he believes India's earnings trajectory remains encouraging, he cautioned that rising global interest rates and bond yields could emerge as the biggest challenge for markets in the months ahead.
Agarwal expects the banking sector to remain one of the key beneficiaries of this trend. Although net interest margins (NIMs) were under pressure during the June quarter, he believes the impact is likely to ease over the next few quarters. He said balance sheet growth remains healthy, asset quality is stable, and valuations for several private sector banks are near multi-year lows, creating an attractive investment opportunity.
"If you look at the two big cohorts of the Nifty components, IT services and banks, the valuations are really low. For the banking sector, at least one can hope for 15% to 18% earnings growth," Agarwal said.
Beyond large banks, Agarwal also remains constructive on select small finance banks and other niche lenders. He said many well-managed lenders continue to trade close to book value despite delivering improving return ratios. He believes investors could benefit from both steady earnings growth and a valuation re-rating over the next few years, provided asset quality remains stable.
Outside financials, Agarwal continues to favour textiles. He believes demand from the US remains healthy, while the trade agreement with the UK and a potential deal with the European Union could create fresh export opportunities. He added that the sector also benefits from a high level of domestic sourcing, making a weaker rupee supportive of earnings.
At the same time, he urged investors to keep a close watch on global macroeconomic risks. Rising bond yields in the US and Japan, along with uncertainty over global interest rates, could influence capital flows and valuations across markets. Oil prices also remain an important risk due to continuing geopolitical tensions in the Middle East.
"Rates are the real big risk on the horizon that we all need to watch out for on a global basis," he said.
For the full discussion, watch the accompanying video.
While he believes India's earnings trajectory remains encouraging, he cautioned that rising global interest rates and bond yields could emerge as the biggest challenge for markets in the months ahead.
Agarwal expects the banking sector to remain one of the key beneficiaries of this trend. Although net interest margins (NIMs) were under pressure during the June quarter, he believes the impact is likely to ease over the next few quarters. He said balance sheet growth remains healthy, asset quality is stable, and valuations for several private sector banks are near multi-year lows, creating an attractive investment opportunity.
"If you look at the two big cohorts of the Nifty components, IT services and banks, the valuations are really low. For the banking sector, at least one can hope for 15% to 18% earnings growth," Agarwal said.
Beyond large banks, Agarwal also remains constructive on select small finance banks and other niche lenders. He said many well-managed lenders continue to trade close to book value despite delivering improving return ratios. He believes investors could benefit from both steady earnings growth and a valuation re-rating over the next few years, provided asset quality remains stable.
Outside financials, Agarwal continues to favour textiles. He believes demand from the US remains healthy, while the trade agreement with the UK and a potential deal with the European Union could create fresh export opportunities. He added that the sector also benefits from a high level of domestic sourcing, making a weaker rupee supportive of earnings.
At the same time, he urged investors to keep a close watch on global macroeconomic risks. Rising bond yields in the US and Japan, along with uncertainty over global interest rates, could influence capital flows and valuations across markets. Oil prices also remain an important risk due to continuing geopolitical tensions in the Middle East.
"Rates are the real big risk on the horizon that we all need to watch out for on a global basis," he said.
For the full discussion, watch the accompanying video.
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