Indian equities may have struggled to deliver meaningful returns over the past two years, but improving corporate earnings and attractive valuations are creating a favourable setup for long-term investors, according to Wealth Advisor Rupen Rajguru of Julius Baer.
Speaking to ET NOW, Rajguru said the Indian market’s journey this year has been marked by progress on the earnings front but setbacks due to external challenges.
“If I were to sum it up, the Indian market this year has taken one step ahead and two steps behind,” Rajguru said.
He noted that earnings growth, which had been missing for several quarters, staged a strong comeback in the March quarter.
According to Rajguru, two major external factors have prevented the market from fully benefiting from the earnings recovery.
The first is India’s limited participation in the global artificial intelligence (AI) investment theme, which has attracted substantial global capital toward technology-heavy markets.
“We are on the wrong side of the AI trade so far. The interest level in India from a global investor perspective has been minimal,” he said.
The second challenge stems from geopolitical tensions and ongoing conflicts, which have disrupted the cyclical economic recovery.
“The cyclical recovery which we are seeing has got disturbed because of the war,” Rajguru noted.
He added that while fourth-quarter earnings were encouraging, the ongoing global uncertainties could impact first-quarter earnings performance.
Nifty offers attractive risk-reward at current levels
Despite the near-term challenges, Rajguru believes current market valuations are compelling.
“At the current juncture, if I were to purely look at Nifty around 23,100-23,200 levels, we are poised at a very attractive level from a market perspective,” he said.
He pointed out that the benchmark index is trading at roughly 17 times forward earnings, below its long-term average.
“From a risk-reward ratio perspective, we believe the next two years should be much better than what it has been for the last two years,” Rajguru added.
Rajguru remains constructive on the financial sector, particularly large private sector banks.
He believes the current environment of elevated interest rates globally favours large banks with strong deposit franchises.
“The only sector wherein the valuation is much below the long-term average is financials, particularly large private sector banks,” he said.
According to him, such banks tend to perform better when interest rates remain high, unlike many non-banking financial companies (NBFCs), which benefit more from falling rates.
“Our preference within financials would be towards large private sector banks which have a very strong liability franchise,” Rajguru said.
However, he cautioned that foreign institutional investor (FII) selling remains a key risk because financial stocks hold significant weight in benchmark indices.
While public sector banks (PSBs) have delivered impressive returns over the past two to three years, Rajguru believes the easy gains may already be behind them.
He said the improvement in asset quality and credit costs helped PSBs outperform, but future risks could alter the picture.
“The rerating is already done, and if credit costs pick up again, they are likely to go higher for public sector banks compared to private banks,” he said.
As inflationary pressures and macroeconomic stress emerge, Rajguru expects large private banks to be relatively better positioned.
“Our preference would be towards large private sector banks rather than public sector banks at this stage,” he added.
Consumption story intact despite short-term challenges
Rajguru continues to see opportunities in consumption-related sectors, although he acknowledged that geopolitical tensions have offset several positive domestic policy measures.
He highlighted the impact of interest rate cuts, tax relief measures, GST reductions, and trade agreements, which were expected to boost demand.
“Unfortunately, many of the positive measures by the RBI and the government have got negated because of the war,” he said.
Even so, he expects consumption momentum to continue.
Premium consumption remains long-term favorite
Rajguru said discretionary and premium consumption segments have performed significantly better than staples.
“Our preference remains towards discretionary and premium consumption,” he said.
Staples could outperform in the near term
At the same time, he sees a tactical opportunity in consumer staples.
“Staples as a sector have done practically nothing for seven years, but volume growth has started coming back,” Rajguru noted.
He added that several staple companies have witnessed valuation corrections, creating room for near-term outperformance.
“For the next one or two quarters, some of these companies could outperform the Nifty,” he said.
Metals’ rally has more room to run
Rajguru remains optimistic on the metals sector despite the recent correction.
He believes global inflationary pressures, supply constraints and geopolitical tensions are creating a favourable backdrop for commodity prices.
“We believe we are in the midpoint of the rally and there are still some legs to go,” he said.
The strategist particularly likes select steel and aluminium companies.
However, he warned that China’s economic outlook remains a crucial variable.
“The Chinese economy and growth outlook play a huge role in the overall outlook for metals, and we have to monitor that closely,” Rajguru said.
He expects the sector’s earnings growth story to continue unfolding over the coming quarters.
AI uncertainty clouds IT sector outlook
The Indian IT sector remains one of the most debated areas for investors due to rapid advancements in artificial intelligence.
Rajguru noted that Indian IT stocks have significantly underperformed the US technology-heavy Nasdaq index over the past 18 months.
“The relationship between Indian IT and Nasdaq got broken when AI came into the picture,” he said.
According to him, investors remain uncertain about AI’s long-term impact on Indian IT service providers.
“The real potential impact of AI on Indian IT is the key question in everybody’s mind,” Rajguru said.
He explained that while AI infrastructure and hardware companies have attracted massive investments globally, it remains unclear how AI adoption will affect revenue growth and margins for Indian software exporters.
Valuations offer downside protection
Despite the uncertainty, Rajguru believes valuations provide support to the sector.
“Indian IT companies today are trading at valuations lower than the Nifty,” he said.
He also highlighted attractive shareholder payouts through dividends and buybacks.
“The yield works out to almost 5 per cent and above for many large IT companies,” Rajguru noted.
While he is not calling for a structural rally yet, he expects some recovery in the near term.
“We would definitely not sell into IT at current levels. We expect some kind of tactical bounce,” he said.
Large-cap IT preferred over midcaps
Rajguru remains cautious on mid-cap IT stocks, citing premium valuations and unresolved questions around AI disruption.
“Between large-cap and mid-cap IT, our preference would be towards large-cap IT companies,” he said.
Rajguru said the combination of improving earnings, reasonable valuations and sector-specific opportunities makes the outlook for Indian equities increasingly attractive despite near-term global risks.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
