Markets shrug off India-EU trade deal; stock picking key as valuations stay stretched: Deepak Shenoy

Indian equity markets showed muted reaction to the India–EU trade agreement, with gains remaining modest as investors await clarity on the deal’s final contours, said Deepak Shenoy, Founder & CEO of Capitalmind MF. Shenoy told ET Now that markets have become largely indifferent to both good and bad news in the near term, given global uncertainties and long implementation timelines for trade agreements.

Shenoy noted that while the India–EU deal is structurally positive, its benefits may take a year or more to materialise as multiple EU parliaments must ratify the agreement. He added that several non-tariff barriers—such as import quotas and higher quality standards imposed on Indian products—will determine how meaningful the deal eventually becomes for Indian exporters.

Markets not cheap, opportunities selective

On market positioning, Shenoy cautioned that Indian equities are not broadly cheap, urging investors to remain selective rather than taking aggressive index-level exposure. He highlighted that recent earnings have been impacted by one-time costs stemming from labour law changes, including higher gratuity provisioning and revised wage definitions, which have temporarily dented profitability by 3–5% across several companies.

“These are not structural issues, but they distort near-term earnings and make valuations appear optically expensive,” he said, adding that it could take a few quarters for markets to normalise earnings expectations.

Shenoy pointed out sharp valuation divergences across sectors. While some FMCG companies continue to trade at elevated multiples despite modest growth, several mid- and small-cap companies growing at 25–30% are now available at far more reasonable valuations.

FMCG faces rising competition

Commenting on the FMCG sector, Shenoy said that while overall consumption growth remains intact, large incumbents are facing rising competition from digital-first and regional brands. Improved logistics, online distribution, and easier access to capital have lowered entry barriers, putting pressure on market share and growth rates of established players.

“The FMCG market is exciting for consumers, but not necessarily for dominant incumbents who are losing their near-monopoly advantage,” he said, cautioning that high valuations may not be sustainable unless innovation accelerates.

PSU banks: Growth matters more than valuations

On public sector banks, Shenoy said that price-to-book valuations around one times book are reasonable, provided return on assets (RoA) improves beyond 1%. He expects profitability to strengthen as treasury gains normalise and credit growth expands, though he warned against overpaying for stocks where the government holds more than a 75% stake.

“The risk of government stake dilution in smaller PSU banks could create short-term price pressure,” Shenoy noted, adding that stock selection should be driven by growth visibility rather than headline valuation metrics.

Shenoy emphasised that the current market environment demands patience and bottom-up stock picking. “This is not a market where you buy everything. It’s about identifying businesses with strong growth, reasonable valuations, and resilience to structural changes,” he said.