The market has rebounded from its March lows, but remains well below its all-time highs despite easing macro headwinds. What is holding back the recovery, especially in largecaps?
The relative weakness in the Indian market compared to global peers is a function of flows and not a verdict on corporate India. Domestic earnings and macro fundamentals have held up far better than what the selling by foreign institutional investors (FIIs) suggests.
Historically, India’s premium has been underpinned by better returns on equity and more durable earnings growth. As investors rotated towards markets perceived to be immediate beneficiaries of the AI cycle, that premium narrowed. And India, given its size and liquidity, became a natural source of funding for those reallocations. While India's valuation premium has moderated, it remains above several Asian peers. Combined with a weaker rupee, this has kept many global investors underweight on India despite resilient macroeconomic and corporate fundamentals. The cycle will turn at some point when the AI theme loses steam or global valuations gets stretched. In such a scenario, India will start to look better on a relative basis.
With so many global investors underweight on India, even a modest improvement in performance could pull them back. That catch-up buying could fuel a rally for a while.
Do the current valuations and earnings growth expectations leave room for meaningful upside from here?
The simple answer is yes. However, the upside will have to be earned by earnings growth (in the near term), not by valuations expanding. The Nifty trades at close to 20 times trailing earnings, near its long-term average. It is currently neither cheap enough to be exciting about nor expensive enough to worry about. If 2026-27 (FY27) earnings grow at the expected 12–15 per cent, that alone supports high-single to low-double-digit returns. The market will take its time to get a meaningful re-rating from here. Returns may come from businesses that can consistently compound earnings and generate steady cash flows. In this environment, active portfolio construction becomes more important than market timing.
What factors are likely to drive equity markets in the coming months?
It would be corporate earnings, above everything else. Other factors that would influence how much money flows into markets like India include the US Federal Reserve’s rate path, the Reserve Bank of India’s (RBI’s) policy decisions, global liquidity, and geopolitics. Consumption, private capex, government spending and the monsoon will help ascertain how growth is shaping up. Some volatility around policy decisions and global events is inevitable. If earnings continue to improve and liquidity stays supportive, Indian equities should remain well placed over the medium term.
Which sectors are best positioned to do well, going forward? Are there any sectors where you remain cautious?
We prefer businesses with improving earnings visibility and intact structural drivers. Healthcare and pharmaceuticals continue to offer better long-term opportunities and select private sector banks and financials remain well-placed given healthy balance sheets and steady credit growth. Manufacturing, industrials and select capital goods companies may benefit from India's investment cycle. The build-out of digital infrastructure creates opportunities in businesses linked to data centres, power equipment and allied engineering. We also see a long runway for select electric vehicle manufacturers and the broader electric mobility ecosystem. This is a market where choosing the right company matters far more than choosing the right sector.
What are the key risks that equity markets face at this juncture?
Any escalation in geopolitical tensions or a sharp slowdown in global growth will have an impact. It also remains exposed to the risk of global inflation staying higher than expected, forcing central banks to keep interest rates elevated for longer. On the domestic front, any meaningful disappointment in earnings, investment or consumption could weigh on sentiment. These risks are worth watching, but it’s worth remembering that India’s macroeconomic position today is considerably stronger than in previous periods of global uncertainty.
The broader markets have significantly outperformed since April. Do you expect this to continue?
The rally has been supported by improving sentiment, strong domestic liquidity and hopes of better earnings. But after this sharp run, valuations in several pockets of the mid and smallcap universe are looking stretched. From here, returns will be more selective, which is typically supportive for active managers. Companies with strong business models, disciplined capital allocation and sustainable earnings growth should keep doing well. Weaker businesses will find it harder to justify their price tags.
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