Don't expect more than a mid-to-high single digit return: KIE CEO Gupta

Kotak Institutional Equities CEO Pratik Gupta warns that high oil prices, AI disruption and monsoon uncertainty could cap gains in Indian equities

Equity markets may have staged a sharp rebound from recent lows, but risks tied to elevated oil prices, monsoon uncertainty and artificial intelligence-led disruption continue to cloud the outlook, says Pratik Gupta, chief executive officer and co-head, Kotak Institutional Equities (KIE). In an interview with Samie Modak in Mumbai, Gupta says the rally has been driven largely by domestic liquidity, rather than a return of foreign capital. Edited excerpts:

 

Are you surprised by the market rebound despite geopolitical uncertainty, especially around oil?

 

Not entirely. Before the rebound, markets had corrected meaningfully — the Nifty fell from above 26,000 to below 23,000, about a 12 per cent decline. At that point, investors were pricing in a worst-case scenario: an escalating conflict, oil at $120-plus, and heavy foreign selling. What has changed is the outlook on the war. Initially, fear dominated with concerns over further escalation and extreme outcomes. Now, the market is pricing in a more contained scenario, with expectations that the conflict will eventually be settled. That shift from fear to cautious optimism explains the rebound.

 

So what’s really driving the recovery — fundamentals or flows?

 

The fundamental outlook is no longer as bad as feared, and the rebound has been led largely by local flows. Foreign portfolio investor (FPI) sentiment remains weak, but we’ve seen some moderation in selling. Having said that, FPIs haven’t meaningfully returned. This is primarily a domestic liquidity-driven market. Strong inflows into mutual funds and insurance have supported equities. Some reallocation from commodities like gold and silver has also helped. Importantly, the market hasn’t fully recovered to previous highs — largecaps remain below peaks, while mid- and smallcaps have rebounded more sharply, largely due to domestic participation.

 

How has the government response to the crisis influenced market sentiment?

 

The government has cushioned the consumer by holding fuel prices largely steady. The burden has been absorbed by oil marketing companies. So far, India’s macro position — controlled fiscal deficit, manageable inflation, decent forex reserves — has allowed it to absorb the shock. But the key risk is duration of the conflict. If disruptions persist — say, oil supply routes remain constrained for a couple of months — that’s when macro stress could build sharply.

 

What are the biggest risks markets are watching right now?

 

The three key risks are high energy prices, monsoon uncertainty and global AI disruption risks. A prolonged spike or supply disruption in the energy markets will hurt the domestic economy. Monsoon is projected to be below-normal, but it still remains a wildcard until June. Also, the IT/BPO services jobs are vulnerable to AI-led disruption, which would impact domestic consumption as well. 

 

Why are foreign investors still cautious on India?

 

Valuations are a major factor. India has corrected, but it’s still an expensive market. The Nifty trades at up to 19 times one-year forward earnings. That’s still around a 50 per cent premium to emerging markets. At the same time, growth is moderating (nominal GDP is at 10 per cent), earnings growth is expected to be around a 15 per cent CAGR (compounded annual growth rate) in FY27 and FY28, with downside risks. India is currently neither a pure AI play, nor a high-growth outlier, which reduces its relative appeal versus markets like Korea, Taiwan, or even Brazil. In addition, foreign investors also complain that India is the only major emerging market that imposes a capital gains tax on FPIs, which further impacts returns — especially in an environment where the currency is also at risk of weakening further, given an elevated current account deficit this year.

 

What kind of returns should investors expect from here?

 

One should not expect very high returns over the next 6-12 months given current valuations and various risks. At the Nifty level, one shouldn’t expect more than a mid-to-high single digit return. Upside is capped by valuations, while downside risks remain if oil spikes further, monsoon disappoints and AI disruption risks intensify.

 

Does the energy shock have any long-term implications? 

Yes, structurally it could drive greater focus on renewable energy and self-sufficiency, diversification of import sources (oil, gas, fertilisers), investments in strategic reserves and storage capacity. It will lead to reduced reliance on “just-in-time” supply chains. So, while the shock is negative in the short term, it may lead to relatively better long-term resilience eventually.

 

Should investors still prefer largecaps over mid- and smallcaps?

 

Yes, broadly. Mid- and smallcaps have already rallied 15-20 per cent from recent lows, and valuations remain at a premium to largecaps. The current environment — characterised by elevated oil prices, macro uncertainty and slower growth — is not conducive for sustained smallcap outperformance. That said, there are select opportunities, but investing needs to be highly stock-specific.

 

Why are mid- and smallcaps still seeing strong inflows?

 

It’s largely due to domestic money with limited alternatives; overseas investing avenues are restricted, fixed income returns are unattractive post-tax, and real estate returns have moderated. Gold and silver also don’t look as attractive now. So liquidity is flowing into equities, including mid- and smallcaps, even if fundamentals don’t fully justify it.

 

Is the risk in equities being underestimated?

 

Yes, to some extent. We haven’t seen a deep, prolonged correction in recent years. Many investors, especially newer entrants, may not fully appreciate the downside risks. Equity investing is inherently volatile, and scenarios like oil at $120-150 could trigger sharp corrections.

 

Which sectors look attractive in this environment?

 

Selectively private banks, especially large caps, remain attractive. Telecom, life insurance, healthcare continue to have structural tailwinds. Some consumer stocks have rebounded after being overly beaten down. However, many of these themes have already seen a significant re-rating.