ETMarkets Smart Talk: Sectors to watch in 2H2025 - Defence, Real Estate, Aviation, says Alok Agarwal

Time of India

25-06-2025

In this edition of ETMarkets Smart Talk, we catch up with
Alok Agarwal
, Head – Quant and Fund Manager at Alchemy Capital Management, to discuss the sectoral outlook for the second half of 2025.
Amid improving macro stability, robust earnings momentum, and supportive monetary policy, Agarwal believes India is entering a favourable phase for select high-growth
sectors
.
by Taboola
by Taboola
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He highlights
defence
,
real estate
,
aviation
, electronic manufacturing, and capital markets as the key themes likely to outperform in 2H2025.
With nominal GDP growth expected to remain in double digits and structural reforms in play, these sectors are well-positioned to deliver earnings well above market averages. Edited Excerpts –
Q) June is turning out to be a volatile month for D-Street. How is 2H2025 likely to pan out for Indian markets? Do you think most of the negatives are behind us?
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A) June 2025 has been a volatile month, with the Indian stock market experiencing significant fluctuations, led by the global uncertainties, such as the Iran-Israel war, the US trade policies and inflation fears. The FPI flows have been marginally negative too.
However, in our view, the outlook for the second half of 2025 (2H2025) leans towards recovery. The recently concluded Q4FY25 earnings season was fairly strong with
Nifty
500 reporting an aggregate growth of over 11% YoY, and Nifty 500 ex-Nifty 50 reporting growth of over 20% YoY.
Corporate earnings momentum remains intact, macro stability is improving, and liquidity conditions are supportive.
The corporate earnings to GDP ratio is now at a 17-year high, the GST collection growth in May 2025 was the highest since October 2022, the inflation is at over a six-year low, and the
RBI
has been proactively supportive of growth and liquidity.
The RBI's 50 basis points (bps) repo rate cut on June 6, 2025, to 5.5% is a significant catalyst, reducing borrowing costs and stimulating economic activity. Plus, the CRR (Cash Reserve Ratio) has been cut to a record low level of 3.0%.
In our view, the bulk of the negatives are priced in. However, we would be closely following the Iran-Israel war too for any unexpected escalation and its impact on crude oil.
Q) What does 50 bps cut mean for equity and bond markets? What should be an asset allocation strategy?
A) The RBI's 50 bps repo rate cut is a pivotal move to support growth amid low inflation (2.8% in May 2025 – lowest since February 2019).
Falling inflation and rates are positive for both the equity and bond markets. For equity markets, lower interest rates reduce borrowing costs, encouraging investment and consumption, which can boost corporate earnings and stock prices.
Sectors like real estate, infrastructure, and consumer durables are direct beneficiaries of the rate cut, reducing funding costs for banks and stimulating lending. Moreover, falling rates are also positive for valuations.
For bond markets, the rate cut leads to higher bond prices and lower yields, making bonds more attractive for income-seeking investors.
The accompanying 100 bps cut in the Cash Reserve Ratio (CRR) to 3%, releasing ₹2.5 lakh crore in liquidity further supports bond markets.
The policy's stance has shifted to 'neutral,' suggesting the easing cycle may pause, however, the immediate impact is positive for both asset classes.
While we do see a longer runway of growth for equity and limited room for further rate cuts, yet for asset allocation, individual risk-reward requirements could be quite different and hence one should reach out to their investment/financial advisors.
At Alchemy, we are positive on equity and do expect a prolonged period of double-digit nominal GDP growth in India.
Q) What is your take on Q4 earnings from India Inc.? Any hits and misses which you tracked in the results?
A) The aggregate of Nifty 500 Index companies showed a YoY growth of 11.9% in the net profits, higher than estimates of just touching double digits. The break-up is even more interesting:
Agencies
As evident from the above table, the Nifty 50 earnings were a drag on the overall numbers. The broader markets, including the Nifty Next 50, grew at a healthy pace with operating profit growing at 14% YoY and net profit at over 22% YoY.
Index heavyweight sectors saw sluggish growth. Oil & gas -4% YoY, private banks -3% YoY, consumer 4% YoY, technology 3% YoY.
However, with the economic numbers rebounding, the GST collections improving, and multi-year low inflation and rates, the outlook is much brighter.
Q) Nifty Bank hit a record high in June which suggests that there is a lot of interest in banking stocks. What is fuelling the rally in financials – is it the rate cut by RBI?
A) Falling inflation and hence falling interest rates are good for lenders as they reduce funding costs and stimulate lending. Healthy Q4FY25 earnings, with banks performing well despite margin pressures, also contributed to the Nifty Bank's rally.
The sector's resilience, supported by the RBI's easing cycle, reflects investor confidence. The protected margins and strong control over credit costs are aiding the strength.
With inflation at over six-year lows and CRR at record low, there is limited room for more easing via rates and CRR by the RBI.
However, the bank loan growth has fallen to a three-year low of 9.8% YoY (for the fortnight ended May 23, 2025) and deposit growth is also struggling near a two-year low of 10%. When the RBI cut rates, it was a choice between growth and margins for the banks.
Few banks chose to protect margins and cut deposit rates, while others have maintained. It will be interesting to see who wins the battle to mobilise deposits.
Q) Which sectors are likely to remain in limelight in the 2H2025?
A) For 2H2025, several sectors are expected to remain in the limelight, driven by India's structural growth story and policy support.
The sectors that have been growing well include Industrials (led by defence, power), electronic manufacturing companies, capital market plays (exchanges, intermediaries, brokers, AMCs, wealth managers), hospitals, hotels, aviation, real estate and cement.
In a scenario where nominal GDP is expected to be just over double digits, and top index heavy weight sectors' profit growth is struggling to match the nominal GDP growth, the above-mentioned sectors have been reporting profit growth well in excess of nominal GDP growth and more importantly, consensus estimates point towards continued higher growth.
Q) The tonality keeps changing from the US when it comes to 'Trade Talks'. Do you think it is still a relevant headwind for equity markets across the globe?
A) US trade talks, particularly with China, have seen fluctuations, with recent discussions in London in early June 2025 resulting in a framework agreement.
The deal aims to ease tariffs and export controls, but its durability is uncertain, offering little resolution to deeper issues. Market reactions have been cautious, with mixed global sentiments, reflecting ongoing uncertainty.
For India, while direct impact is limited, global economic conditions and FPI flows are affected, keeping trade talks a relevant headwind, though the impact value has substantially reduced.
Q) China equity markets are up in double digits while we have underperformed most EM peers. Does it make a case for global diversification?
A) In USD terms, China's Shanghai Composite Index has delivered 2.7% returns so far this year, compared Nifty 50 Index's 4.1%. While India's index corrected more sharply earlier in the year, the recovery has been sharper too.
India has rare combination of:
Falling dependency ratio for the last 30 years and likely to continue for another 20 years
Double-digit nominal GDP growth
Double-digit corporate earnings growth
Double-digit corporate ROE
Over 500 companies with $1bn plus market cap
Diversified market with good depth across sectors
Per capita income at inflexion point of $2500
Shorter term, notwithstanding, India is set to outperform the world and its neighbours, in our view.
While diversification always makes sense, the better diversification would be an EM (emerging market) basket as compared to a DM (developed market) basket.
Q) Which sector(s) is/are looking overheated and why?
A) Overheated is a relative term. A sector that grows at a fast pace or expected to grow at a fast pace cannot be really compared with the one which is struggling for growth.
Same goes with valuations – PEG (price/earnings to growth) ratios throw more light on reasonableness of valuation as compared to PE alone.
BSE 500 Index trades at a one-year forward PE of 22x and next two years earnings growth is estimated to be at 10%. This translates into a PEG ratio of 2.2x. As a house, our investment framework is built around GARP methodology, which favours Growth at Reasonable Price.
Ideally, if the growth is above market and the PEG is below market, its preferred. But the sectors that have run up, where estimated growth could be lower than market growth and PEG is quite high compared to market – are the sectors which we find overheated. In our view, these include oil & gas, FMCG, IT and select banks.