Risk of Geopolitics Behind Us: HSL Prime Research Head Devarsh Vakil Sees Market Bottom, Spots Sectoral Opportunities

Mumbai, April 10: “Risk of geopolitics is behind us,” Devarsh Vakil, Head of HSL Prime Research said on Friday in an interview. While outcomes would still depend on how global negotiations pan out over the coming weeks, Vakil stated that macro indicators suggest markets could be near a bottom with adequate opportunities for those looking to construct long-term portfolios.

Is the Worst Behind Us? Markets Near Bottom Levels

Vakil said that even though near-term visibility is clouded due to geopolitical tensions, valuations and macro-data suggest markets have reached cyclical lows. Markets are trading at 17–18x forward earnings even after earnings growth expectations moderating from 16% to 12%. Historically such valuations have suggested a market bottom.

The Nifty’s support zone is around 22,500 and unless there is a huge negative surprise, downside should be limited from here on. “If you take a 10–20 month view from here on, there is money to be made in the market. Even if markets correct further from here on, buying into these levels and holding should generate meaningful returns”, Vakil said.

Sectorally, Which Opportunities Should Investors Look at?

Vakil reiterated his long-term investment philosophy of focusing on “mispriced growth” – buying attractive growth at reasonable valuations and avoiding expensive growth as well as value traps. While macro uncertainties could remain for a while longer, he stated that India’s growth story with regards to GDP and corporate earnings remain intact.

Topline growth remains strongest in IT and chemicals at close to 40% y-o-y from low bases, while metal will see around 20% growth. Insurance remains a structural growth story too.

However, not all of the expected earnings growth is priced in which creates opportunities for investors. Vakil preferred opportunities are IT, industrials, real estate and auto – sectors where earnings are strong and valuations are reasonable.

Large Caps or Mid/Small Caps? Where are the Opportunities?

Large caps have outperformed the broader markets over the past month as investors rushed to safety. But Vakil highlighted that the broader markets have seen sharp corrections with small caps dipping close to 40% from their peak while midcaps have fallen around 32%.

While valuations have certainly improved, he believes large caps offer relatively better risk-reward.

That said, opportunities are beginning to emerge across market caps. In a recent study by his team looking at stocks ranked between 500 and 2000, both balance sheets as well as return ratios have improved significantly.

Debt/equity ratios are at decade-low levels while return ratios have improved from sub-10% to around 13% currently.

“This means smaller companies are better prepared to deal with uncertainties and going forward there will be lot of stock specific opportunities in these segments too. Investors should use a bottom-up stock picking strategy”, Vakil suggested.

What is his Model Portfolio? Large Cap Focussed Bets

Vakil outlined his model portfolio with a focus on high-quality large caps across sectors. In financials, he prefers ICICI Bank, Kotak Mahindra Bank, State Bank of India, and SBI Life Insurance. In industrials and infrastructure, Larsen & Toubro and Cummins India feature prominently.

Among IT firms too, Vakil likes frontline stocks such as HCL Technologies, TCS and Infosys despite weak Street sentiment on IT. Utility plays such as NTPC and Power Grid give him comfort on the long-term structural demand story for power.

“All these companies are high-quality compounders and are available at favourable risk-reward at current levels,” he added.

IT: Likes Frontline Stocks Despite Street Scepticism

On IT, Vakil took a contrarian view. He noted that the Street remains quite sceptical on IT despite recent earnings – even though TCS beat EPS estimates – as revenue growth disappointed and margins came in flat.

But Vakil saw comfort in the fact margins surprised to an eight quarter high. “Visibility is improving with BFSI demand strengthening and growth picking up on the enterprise transformation side as well as with new GenAI projects,” he added.

“We are relatively positive than the Street would suggest and would be slightly overweight on IT,” he concluded.

Real Estate: Finds Current Valuations Attractive

On real estate, Vakil thinks markets have fallen too much compared to fundamentals. He expects strong growth in both project launches as well as pre-sales in FY27 which justifies current valuations.

“The demand side environment continues to remain healthy. Markets will start pricing in growth once geopolitical uncertainties ease,” he noted. Vakil believes the real estate cycle may extend farther than markets anticipate.

Industrials and Capital Expenditure Theme

On industrials and infrastructure, Vakil expects strong support from government capex as well as investments into manufacturing, renewable energy, defence etc. even if government spending allocations get impacted due to geopolitical pressures.

“Both sectors are available at reasonable valuations and offer strong visibility going forward,” he concluded.

Oil & gas: Turns Cautious, Shifts from Overweight to Neutral

Interestingly, Vakil has turned negative on oil & gas. He has moved from overweight to neutral on the sector as he feels the Street could be discounting too much near-term benefit to upstream companies as well as refining margins due to higher crude prices.

“We are redeploying capital away from oil & gas into other sectors with better growth visibility,” he said.

Dealing with Geopolitical Crisis: Lessons From History and How to Play Them

Studying previous geopolitical events such as Kargil, Iraq war, and Russia-Ukraine conflict – among others – Vakil’s team observed that whenever there is a geopolitical crisis markets usually fall 10-15% with the median fall during such events being around 11%.

“Thereafter whenever uncertainties ease, markets have rallied sharply in the next one to six months following such events,” he said. Based on this observation, his team had put together a “bounce-back basket” of 10 stocks across sectors such as construction, cement, aviation, and oil marketing companies which tend to benefit from rapid recovery in sentiment.

“This strategy has a 6-9 month horizon – both to benefit from earnings recovery as well as from valuation re-rating,” he said.

On Valuations and Flows

Vakil pointed out that FIIs have been hesitant to step back into India due to volatile currency movement and relative attractiveness in other markets. What’s more, India is trading at a valuation premium to MSCI indices.

However, he highlighted that this premium has come down sharply from around 100% in early 2023 to around 13% now.

Domestic flows have remained strong with monthly SIP inflows at ₹32,000 crore while total equity inflows at around ₹40,000 crore. “Retail investors are not selling, they are putting money at lower levels. Once FIIs start coming back, markets can take off,” he concluded.

Could Markets Hit Fresh Highs in 9-18 Months?

Responding to a query on how far could markets rise, Vakil expects markets to potentially hit fresh highs in 9 to 18 months if earnings grow in line with expectations, the monsoon is good and inflation and inflation expectations remain sticky.

He does see risks to the above scenario – particularly from food prices as well as any external shocks – but says he remains positive on markets over the coming year.