Markets Shrug Off India-EU Trade Deal: Stock Picking Is Key as Valuations Remain Stretched
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Indian equity markets showed a restrained response to the India-EU trade agreement, with gains remaining modest. Investors are seeking clarity on the final details of the deal, according to Deepak Shenoy, Founder and CEO of Capitalmind MF. He emphasized that the markets have become largely indifferent to both positive and negative news in the short term, largely due to global uncertainties and the lengthy implementation timelines typical of trade agreements.
India-EU Trade Deal: Structural Positivity with Delayed Benefits
– The India-EU deal is structurally advantageous; however, its benefits may take at least a year to materialize, as several EU parliaments need to ratify the agreement.
– Non-tariff barriers, including import quotas and heightened quality standards for Indian products, will significantly impact the deal’s effectiveness for Indian exporters.
Opportunities in Selective Stock Picking
Shenoy cautioned that Indian equities are not broadly appealing in terms of valuation, urging investors to adopt a selective approach rather than taking aggressive exposure at the index level:
– Recent earnings have been affected by one-time costs linked to labor law changes, including increased gratuity provisions and revised wage definitions, which have temporarily decreased profitability by 3-5% across various companies.
– These distortions are not structural issues but affect near-term earnings, leading to valuations that may seem optically high. Normalizing earnings expectations could take several quarters.
Shenoy highlighted the stark valuation disparities across sectors:
– Some FMCG companies are trading at inflated multiples despite only modest growth.
– In contrast, numerous mid- and small-cap companies showcasing growth rates of 25-30% are now available at much more reasonable valuations.
FMCG Sector: Navigating Competition and Evolution
In discussing the FMCG sector, Shenoy pointed out:
– Overall consumption growth remains strong; however, leading incumbents face increasing competition from digital-first and regional brands.
– Improved logistics, enhanced online distribution, and easier access to capital have lowered barriers to entry, which threatens the market share and growth rates of established players.
Shenoy remarked, “The FMCG market offers exciting prospects for consumers, but not necessarily for dominant incumbents who risk losing their near-monopoly advantage.” He warned that sustaining high valuations may not be feasible unless innovation accelerates within the sector.
Public Sector Banks: Growth Over Valuation
Regarding public sector banks, Shenoy noted that price-to-book ratios around one time book value are justifiable if return on assets (RoA) exceeds 1%. He expects profitability to enhance as treasury gains normalize and credit growth improves, but he cautioned against overpaying for stocks with over 75% government ownership. “The risk of government stake dilution in smaller PSU banks could exert short-term price pressure,” he added, emphasizing that stock selection should prioritize growth visibility over superficial valuation metrics.
Conclusion: Patience and Discernment in Stock Picking
Shenoy concluded by underscoring that the current market environment necessitates patience and a focus on bottom-up stock picking. “This is not a market for indiscriminate buying. It’s crucial to identify businesses with solid growth prospects, reasonable valuations, and resilience to structural changes.”
As investors navigate the complexities of the India-EU trade deal and its implications, the emphasis on selective stock picking will be vital in maximizing opportunities in a time of stretched valuations.