'2026 offers a strong case for foreign investor sentiment revival'

After significant outflows around $8 billion overall and $17 billion from equities, FII holdings are at multi-year lows, said Ankur Jhaveri of JM Financial Institutional Securities

With Indian stock markets ruling near all-time highs, valuations, said Ankur Jhaveri, MD & CEO, Institutional Equities, JM Financial Institutional Securities in an email interview with Puneet Wadhwa, stand at around 21x one-year forward price-earnings (PE), which is roughly one standard-deviation above the long-term mean. At these levels, he said, the market cannot be considered excessively priced or disconnected from fundamentals. Edited excerpts:

What's your market strategy for 2026? 

Our strategy for 2026 remains anchored in earnings visibility and balance-sheet strength. Q2-FY26 was strong, and we expect H2FY26 to be dominated by large-cap performance, given their resilience and higher proportion of earnings upgrades. In contrast, small caps have seen more EPS misses, which reinforces our preference for stability in the near-term.

 

That said, we anticipate a broadening of earnings momentum as the cycle matures. While large caps will continue to be the core of our allocation, we see selective opportunities in mid-caps, particularly companies that are market leaders with a large addressable market and strong fundamentals.

 

Overall, our approach is to stay constructive on domestic demand plays while maintaining exposure to information technology (IT) as a direct beneficiary of US economic trends. A disciplined, quality-focused strategy will remain key as global uncertainties persist.  ALSO READ | DBS flags 3 top risks to global markets in 2026; US tech correction looms

Do you think that the markets are adequately reflecting the economy/GDP data positives?

Markets have largely been responsive to both micro and macro developments. The recent rally following the benign October inflation print and its subsequent pause after the robust Q2-FY26 GDP release illustrates this dynamic.

 

Valuations today stand at around 21x one-year forward price-earnings (PE), which is roughly one standard deviation above the long-term mean. At these levels, the market cannot be considered excessively priced or disconnected from fundamentals.

Are corporate earnings supportive of the overall market sentiment?

The September 2025 quarter (Q2-FY26) results have been encouraging, supported by rating upgrades, and earlier earnings per share (EPS) cuts for FY24-25 are now well understood. While large-cap performance has been somewhat polarized, if FY27 earnings deliver the expected 15.9 per cent EPS growth, current valuations appear fair. Further earnings momentum will likely be rewarded by the market.

Is the yen carry trade an overhang?

The first leg of unwinding has already occurred. However, Japanese holdings of US Treasuries have risen to $1.19 trillion in September 2025 from $1 trillion in 2024, suggesting that any further unwinding will likely be gradual rather than disruptive.  ALSO READ | Investors unlikely to make much money in India next year: Marc Faber

Can 2026 revive foreign investor sentiment for India?

2026 offers a strong case for revival in foreign investor sentiment toward India. After significant outflows around $8 billion overall and $17 billion from equities, FII holdings are at multi-year lows. This creates room for reallocation, especially as India continues to deliver robust domestic consumption, policy stability, and a supportive regulatory environment.

 

Foreign investors typically chase growth at reasonable valuations, and India has consistently outperformed most Asian peers. While some consolidation in FY27 is likely as part of a rotational strategy, structural drivers such as tariff rationalization and new bilateral trade agreements will provide further impetus for FII inflows. Beyond India, developed markets like Europe could attract flows, driven by increased defence spending and strategic investments. 

Has India Inc. firmly put behind worries related to the US tariffs?

While the absence of a definitive trade deal with the US remains an overhang, India Inc has largely adapted to tariff-related challenges. Structural reforms and strong domestic consumption continue to underpin growth, even as negotiations progress.

 

On sector leadership, we expect a broad-based recovery. Consumption-driven sectors such as Auto, Consumer Discretionary, Hotels, and Manufacturing will complement cyclical plays in Oil & Gas, Metals & Mining, IT Services, Telecom, Infrastructure, and NBFCs. Healthy balance sheets and improving demand trends reinforce our view that earnings momentum will accelerate through FY26 and beyond.

We are not too far away from the budget. What are your expectations, or has the government maxed out on policy-related boost in the last year?

The upcoming budget will likely maintain its focus on fiscal consolidation, but I believe there is still room for policy support to sustain growth. While weaker nominal GDP could exert pressure on tax collections and the fiscal deficit target of 4.4 per cent for FY26, continued consumption momentum can offset some of this through higher revenues.

 

The first cycle of consumption recovery is largely behind us, and if it persists, it will strengthen the government’s ability to consolidate fiscally without compromising growth. Any contraction in capital expenditure would be viewed negatively, particularly in critical areas like defense, infrastructure, and rural development. These sectors are essential for long-term economic resilience and inclusive growth. 

Key monitorables will include incremental measures to boost consumption and how they balance with capex allocation. A well-calibrated approach can ensure fiscal prudence while supporting the investment cycle and domestic demand.