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During such bullish phases, the appetite for risk can increase to a point where individuals may find it challenging to manage financially, Agarwal, founder of Demeter Advisors, told BQ Prime’s Niraj Shah. However, they continue playing the game because it seems too attractive to resist, he said.
“…This is when mistakes happen because investors take risks they don’t understand and, sometimes, the risks are greater than their ability to bear the financial consequences of it.”
Over the past two months, a significant influx of foreign investments had been a driving force in the market, Agarwal said. “I think India is a little bit of a one-eyed king in the land of the blind.”
If certain other emerging markets begin to exhibit appealing valuations, there could be a reduction in foreign capital flowing into India, he said. Agarwal does not anticipate large-scale capital outflows in the immediate future, but says inflows may moderate.
The first-quarter earnings were “decent” and the macro environment in India looks fine, Agarwal said.
Some risk-off might emerge globally amid global market volatility, oil price rise and interest rates remaining high for longer. However, Agrawal does not expect a major sell-down in large caps.
He highlighted that in the mid-cap and small-cap segments, there are pockets that have reached extreme levels of overvaluation.
In the defence and railway sector, the principal customer is the government, Agarwal said.
Historical evidence indicates that when the government serves as the primary customer, delays, disputes, and cash flow problems can arise, he said. These issues have manifested in the past and are expected to persist in the future. The government’s business practices have not undergone substantial transformation, according to him.
There is a certain way in which the government bodies are forced to conduct themselves because of vigilance and other issues that they have to deal with, he said. “And, therefore, to say that all plans will get done in the manner that they are envisaged today, I think is a bit of a stretch.”
Financial Services
Financial services continues to be part of Agarwal’s portfolio. The macro environment for growth is extremely positive there, he said. “I would say that the business environment is very constructive and valuations are still reasonable.”
Pharmaceuticals
The other area which interests Agarwal is pharmaceuticals. “I see some green shoots there, especially with the level of underpricing in the U.S. having reached an extreme and drug shortages becoming very high and that has started to play itself out,” he said.
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