Sentiment towards India more favourable than month ago: Abhiram Eleswarapu

After prolonged underperformance, India is regaining appeal among emerging markets as trade overhangs ease, foreign inflows return, and earnings show early signs of recovery

India’s significant underperformance vis-a-vis other emerging markets (EMs) has enhanced its relative appeal, says Abhiram Eleswarapu, head of equities at BNP Paribas. In an interview with Sundar Sethuraman and Samie Modak in Mumbai, Eleswarapu says recent trade deals with the European Union (EU) and the United States (US) have eased tariff-related overhangs, while the return of foreign inflows suggests investors are responding positively to these developments. Edited excerpts: 

India has underperformed other emerging market funds (EMFs) over the past year and even this year. Why has India gone out of favour? 

The simplest explanation is that India was not part of the global artificial intelligence (AI) trade. North Asian and US-listed stocks benefited far more from AI-led growth, particularly in technology, and saw significant earnings upgrades. India did not offer direct exposure to that theme. Second, starting valuations were already relatively high, which limited the scope for adding positions. These two factors largely explain India’s underperformance. 

Was this underperformance driven more by earnings or valuation concerns? 

Over the last 12 months, India didn’t see major earnings cuts, but it also didn’t see the earnings upgrades that other economies did. The same global investor pool that was enthusiastic about India two years ago found better opportunities elsewhere. 

Do these overhangs persist, or are things starting to improve? 

Markets tend to self-correct unless there’s a structural problem, which isn’t the case in India. After significant underperformance, investors are now looking for positive catalysts to re-engage with India. These catalysts have emerged in two forms: the India-US trade developments and finalisation of the EU-India free trade agreement (FTA). As a result, February has seen foreign inflows into Indian markets, which is a reversal of the recent trend. 

Additionally, earnings have seen slight upgrades of around 2-3 per cent over the last one or two months, suggesting early signs of improvement. 

Are recent inflows just part of broader EM flows, or are investors making active India calls? 

It’s still early to dissect the flows. While India may be benefiting from broader EM allocations, that explanation alone doesn’t fully hold, as India was seeing outflows just a few months ago while other EMs were in favour. India has clearly seen some positive catalysts emerge over the past few weeks, and sentiment today is more favourable than it was even a month ago. 

Valuations are often cited as still not attractive enough. What’s your view? 

The market is trading at around 20 times one-year forward earnings, which is about 5-6 per cent more expensive than the average of the past five-six years. Our view is that returns this year are likely to be in single digits. 

How is India positioned in your global and Asia portfolios? 

Within our Asia-ex-Japan construct, India remains overweight for us. We haven’t changed that positioning; in fact, we are more positive after the fall. Our strategists believe that India is starting to look attractive again. 

Given 18 months of underperformance, why not turn outright positive on India? 

Our core view on India has always been structural. Now, we have also turned cyclically positive. Relative to other markets, India looks attractive today. A couple of years ago, valuations were expensive, particularly in mid and smallcaps. Today, the risk-reward looks more favourable. 

What are the key tailwinds supporting a more positive cyclical view? 

First, significant underperformance has improved India’s relative appeal. Second, tariff-related overhang that affected sentiment has eased, particularly with developments with the EU and the US, which are key export markets. The return of foreign inflows suggests that investors are responding positively to these developments. 

Do you expect a meaningful revival in earnings? 

Earnings are the single-biggest driver of long-term returns. Over time, earnings growth has contributed far more to returns than valuation expansion. India is likely to return to double-digit earnings growth over the cycle, though valuations are not cheap enough to drive a sharp rerating. This supports expectations of high single-digit returns rather than a strong broad-based rally. 

Why are return expectations still modest despite a more positive outlook? 

India is a diversified market without a single dominant theme like AI. Unlike markets such as Korea or Taiwan, where tech has driven returns, India tends to deliver steadier, more broad-based performance. That limits volatility both upside and downside.

 

Which sectors look attractive now? 

Capex: The Budget reinforced a steady, long-term capex trajectory across defence, railways, power, steel, and roads. 

 

Consumption: While there were no direct announcements, (income) tax and goods and services tax (GST) cuts over the past six months should gradually support consumption, including of staples. Exports: Export-oriented sectors, especially information technology (IT) services and pharma that have lagged in the past year may be more attractive now.

 

What is your view on IT and financials? 

IT: While IT services are being seen as relative losers in the AI narrative, we believe that companies will benefit from consulting and implementation work related to AI adoption. Growth may not return to past highs, but these firms are unlikely to be structural losers. 

Financials: Banks have performed well, particularly public sector undertaking (PSU) banks and non-banking financial companies (NBFCs). Credit growth is picking up, asset quality remains stable, and valuations are reasonable. Private banks may now offer better relative value. 

What about metals, especially given the de-dollarisation trade and strong gold and silver performance? 

Precious metals performed exceptionally well last year due to geopolitical risks, safety demand, central bank diversification, and a weaker dollar. Some of these tailwinds remain, but if the US Fed holds rates and the dollar stabilises as we expect, returns are likely to be more measured this year compared to last year’s outsized gains. 

Overall, what does this mean for Indian markets in the year ahead? 

With improving earnings trends, better relative valuations, supportive sectoral tailwinds, and the return of foreign inflows, conditions are brewing for modest positive returns this year — though not a sharp rally.