ET Now: We are expecting the announcement as far as US trade deal is concerned anytime that is the indication which has come in from all the channels. But what should one watch out for in terms of level? Do you think there will be an impact on Indian markets per se, or you think we have already absorbed all the negative impact?
Ajay Bagga: Most of the negative impact has been absorbed. If you look at May, the average tariff in the US was 8.8%. In June, it has gone up to 15%. With the full China Geneva deal coming in, the average of all goods imported into the US has gone to 15%.
India will probably get a 10% universal tariff with sectoral tariffs on auto, auto components, as well as, steel and aluminium, from 25% to 50%, that is our expectation, that is what is baked into.
Now, if there is a unilateral letter from Trump saying that negotiations have broken down with India on agriculture and dairy products and we are levying the 24% reciprocal tariffs that had got calculated on 2nd April, then that will be a disappointment for markets. But if it is 10% universal plus sectoral tariffs, that is more or less factored in by the markets.
ET Now: So, you are saying that most of it is priced in by the market. So, what are going to be the triggers for market next? Of course, we are starting with the earning season and what do you see for the earnings come first quarter of FY26, what are you seeing on the earnings front and what are going to be the next triggers for market because we are in a corrective phase right now so there have to be some triggers for the market to pick up direction?
Ajay Bagga: See, three big things we have to keep in mind. Now, one, this market has been in corrective phase since last week of September. So, we have finished nine months. We are very near the median correction time period which is basically 9 to 12 months is what Indian markets really spend in correction territory. So, we have spent the time wise.
Second big trend is that promoter holdings have been reducing along with the FII holdings and domestic holdings have been increasing. Now, domestics are by definition more retail money and more long-term money. So, the strength of the market has been increasing. Valuations are still quite high which is the issue in the markets not rushing towards reclaiming the September all-time high.
The third big thing we have to keep in mind is last April to September because of the follow on to the national elections, so the results came in June and we saw nearly till about September activity was still very slow.
So, from March to September, we lost out a lot of time last year. Earnings were very sluggish. You are going to get the benefit of the base effect this time around. So, we are expecting 12% to 14% earnings growth for NSE 500, that will help the markets, that will make the valuations look a little bit less expensive and there will be pockets which will look attractive, so base effect is coming in.
So, three big things, domestics are owning more of the market, they have reached about 25%, it is going to go to 30% in the next couple of years which will give strength to the markets; second, time-wise we have played out; and third, valuation-wise you are going to see better earnings on a base effect basis.
ET Now: There is a sectoral churn that is happening. So, in this, which sectors are likely to lead from the front because there was a point there where, of course, financials there was a common consensus, but snow in this sectoral churn that is happening what are the pockets of value in your opinion?
Ajay Bagga: Well, there are stocks across sectors, but if you look at sectoral, financials are still well positioned. You will see some amount of a drag because of the rate cuts on the banks’ NIMs, but volume expansion will more than make up for it and going ahead volumes will look better at lower rates, so banks will benefit and the entire financial pack from NBFCs to AMCs to the capital market related companies, insurance companies, those are looking very good.
Second, cement is coming back and we have seen a lot of runup already. Third, consumption, with a good monsoon, rural demand is picking up and urban should follow by the festival season, around October, we should see urban demand also coming in. So, consumption is looking good.
And then, industrials continue. With the amount of spend that the government is doing on the infrastructure side, on defence, on railways, all that will continue to do well. Defence, of course, the valuations becomes an issue at a particular price point and then we see fresh orders coming in and another boost up comes to defence.
So, right now, it is on a pause mode because of the valuations, but it should benefit from the new order flows. It is turning around. It has had a good month and we expect the worst of it to have been over, but more the midcap and smallcap IT will do better than the largecap it.
