Abhay Agarwal bets on midcaps, import substitution themes for growth

Amid persistent global uncertainties and geopolitical tensions in West Asia, market sentiment continues to be weighed down by sustained foreign outflows. However, experts suggest that the current market phase is being driven more by liquidity constraints than stretched valuations, even as underlying domestic resilience remains intact.

Responding to whether valuations could correct further, Abhay Agarwal from Piper Serica highlighted the outsized role of foreign portfolio investor (FPI) selling in shaping market direction.

“Our biggest problem has been consistent FPI selling, which has not halted and keeps worsening every month. If DIIs had not supported the market, the Nifty could have fallen below 20,000.”

Despite these pressures, he noted that investor confidence in India remains intact, even as the country underperforms other emerging markets.

“Despite incessant FPI selling and multiple challenges like geopolitics and tariffs, investors continue to have faith in the market.”

Liquidity Could Trigger Sharp Rebound
Agarwal pointed out that India’s relatively shallow market structure means even small inflows can drive sharp upside moves, making it difficult to maintain a bearish stance.

“In a shallow market like India, even small inflows can push indices higher quickly. Any liquidity return can reverse the trend.”

Earnings Recovery Still Key
Looking ahead, he identified earnings growth and liquidity revival as the two key triggers for the next market leg, while remaining constructive on domestic fundamentals.

“We are not very bearish because domestic consumption remains strong, and there are no major inventory or cash flow challenges.”

He also noted that export-oriented companies continue to benefit from currency movements.

Opportunities Beyond the Index

Agarwal cautioned against relying solely on Nifty valuations as a benchmark for investment decisions, arguing that broader market opportunities are far more compelling.

“Nifty is not the right benchmark for Indian earnings. The real opportunity lies outside Nifty stocks.”

He emphasized that many midcap and smallcap companies are now attractively priced after recent corrections.

“Several midcaps and smallcaps are now available at reasonable valuations after investing in growth over the last five years.”

West Asia Conflict: Sectoral Impact
On the impact of the West Asia conflict, Agarwal indicated that rising crude and input costs are likely to hurt margins in the near term.

“The current quarter will bear the full brunt of high crude prices unless the situation improves.” He warned that sectors dependent on crude derivatives and metals could face pressure, especially if companies are unable to pass on costs. “Margins will be impacted for companies using crude or metals, as passing on costs typically takes time.”

Crisis Also Brings Opportunity
At the same time, Agarwal highlighted that disruptions often create new opportunities, particularly for domestic manufacturers.

“When there is a crisis, there is also an opportunity, especially for companies replacing imports.”He pointed to sectors such as electronics manufacturing, auto components, and specialised pharma outsourcing as key beneficiaries.

“Advanced electronics, auto components, and CDMO/CMO pharma companies are key opportunity areas.”

A More Selective Market Ahead
The broader message for investors is that while macro headwinds persist, the market is becoming increasingly selective. Index-level valuations may not fully capture the opportunities emerging across sectors.

As liquidity conditions evolve and earnings visibility improves, stock-specific strategies—particularly in emerging sectors—are likely to define returns in the coming quarters.