'India has been competing for FII flows since 12 mths, but has been losing'

For FII flows to accelerate - lower crude oil prices, rupee stability and two consecutive quarters of earnings delivery without downgrades seem must, says Jignesh Desai of Centrum Broking.

For flows pick up pace in to the Indian equity markets to, said Mumbai-based Jignesh Desai, CEO – Institutional Equities at Centrum Broking in an email interview with Puneet Wadhwa, crude oil holding below the levels that caused the March scare, rupee stability, and two consecutive quarters of earnings delivery without downgrades are key. Edited excerpts:  How do you see the current risk-reward equation for Indian equities?  Risk-reward is fair, and we would treat it as a reason to be selective rather than to step back. Nifty is trading around 24,300, roughly 7 per cent below its Jan’26 peak and about 9 per cent above the March low of 22,331 that followed the escalation in West Asia. Below 20x FY27e earnings, the index multiple is below the historical average, so we do not see an aggregate valuation problem. Our advice to clients is to use this move to rotate towards stocks with earnings visibility.  At what 10-year G-sec yield would you expect the equity risk-reward to deteriorate materially?  Global yields matter more to us than domestic ones, because they set the cost of the marginal dollar coming into India. The domestic curve has actually been well behaved. The 10-year averaged 6.76 per cent in July against roughly 7.03 per cent in May. We would flag 7.3 per cent to 7.50 per cent on the 10-year, as the level at which risk reward would deteriorate. At that point, the earnings yield gap stops compensating equity holders. On vulnerability, the mechanical answer is private banks, where foreign ownership is highest at around 41 per cent of the sector.  ALSO READ | Earnings & fundamentals are beginning to matter again: Vaibhav Chugh, Abakkus MF  Looking ahead 12–18 months, what is the biggest upside catalyst for Indian equities—and what is the risk that the market may be underestimating?  The biggest upside catalyst is a private capex cycle that finally converts into order inflows and earnings. Industrial credit has picked up across sectors and the investment is going into value-added manufacturing. If that sustains for four to six quarters, it broadens the earnings base well beyond financials.  The risk we think is being underestimated is the monsoon. Cumulative rainfall was 12 per cent below normal in late early August, and the market appears to have filed food inflation away as a solved problem after headline CPI came in at 4.45 per cent in July. A weak kharif and rabi on top of soft rural incomes could break the consumption recovery that FY27 estimates assume.  What's your view on the mid-and small-cap segments?  Here, we would separate the earnings from the valuation. The earnings have been genuinely better, with topline growth in the teens against low single digits for large-caps, so the resilience is not purely a flows story. We are very positive on mid & small-cap ideas, albeit selectively.  ALSO READ | Small, midcap valuations backed by strong earnings growth: Ramesh Mantri  Have foreign investors turned towards Indian equities for good?  We would not use the phrase 'for good,' but the selling phase does look to be behind us. Foreign investors sold $3.45 billion of Indian cash equity in May and $5.16 billion in June, then a net buying of $2.12 billion in July, and August has so far been positive. That is a change in intensity, and intensity usually turns before direction does.  For flows to accelerate, we would want to see three things: crude oil holding below the levels that caused the March scare, the rupee stabilising after a depreciation of roughly 20 per cent, and two consecutive quarters of earnings delivery without downgrades.  Are global investors becoming more constructive on India, or is India still competing with other emerging markets for a limited pool of capital?  India is still competing, and over the last twelve months it has been losing. The Nifty is down about 2 per cent over that period, while Korea is up 103 per cent, Japan 57 per cent and Singapore 35 per cent. India has effectively been the funding market for the North Asia technology trade. Sentiment is improving at the margin, but we should be honest that the constructive conversations are happening at a point when India has underperformed, not because the India story has been re-rated.  What is the biggest disconnect you see today between market valuations and corporate fundamentals?  The disconnect running the other way is private banks. Foreign ownership has fallen, multiples have de-rated to the bottom of their band, and yet credit costs remain contained and asset quality is stable. That is where fundamentals are ahead of the price.  ALSO READ | Nifty can rise 7-8% by year-end; avoid legacy IT stocks: Vinit Bolinjkar  What would it take for the earnings cycle to turn decisively positive, and which sectors are best placed to lead that recovery?  Three conditions, and two of them are already partly in place. First, nominal GDP growth has to recover, because that is what drives topline. Second, input costs including crude and others need to stay benign for next two quarters. Third, credit growth has to broaden beyond retail into industry, which is beginning to happen.  The first quarter of FY27 was the first reporting season in a while where the aggregate surprise was to the upside, with Nifty-50 profits up and ahead of expectations. However, one quarter is not a cycle, but after two years of cuts it changes the direction of revisions.  On leadership, we would back financials first, where credit costs are contained and margins are bottoming out, followed by capital goods and power, which are the direct beneficiaries of the investment cycle. At current levels, we are also positive on IT, given the expected revenue upside anticipated from AI related services.  How are global institutional investors positioning around India’s structural themes—manufacturing, defence, power, infrastructure and financialisation—and where do you see the biggest opportunity still being underappreciated?  Most global investors own these themes through a very narrow set of stocks, usually the two or three largest listed names in each. That gives them the narrative but not the economics, and it is why positioning looks crowded at the top and almost empty below it.  Defence is the clearest example. The budget has gone from Rs 2.53 trillion in 2013-14 to Rs 7.85 trillion in 2026-27, and the AMCA programme has for the first time been opened to private industry, yet foreign positioning is concentrated in a handful of large-caps and index weights remain small. For the next 2-3 years, the defence sector will continue to remain attractive.  The genuinely underappreciated opportunities, in our view, sit one layer down the chain. Transmission, grid and power equipment rather than generation. The electronics component and materials ecosystem rather than the assemblers. And financialisation through insurance and asset management, where systematic investment flows of more than $3 billion a month, in 7 out of last 8 months, behave like an annuity rather than a cycle. We are positive on these sectors with a horizon of 4-5 years. Lastly, the Semi-conductors and data centre focussed industries, too remain appealing with a long term horizon of about 10 years.  With passive investing gaining ground and global funds increasingly using quantitative strategies, how important is traditional sell-side research and differentiated stock-picking becoming for institutional clients?  India's informational inefficiency has always been in the mid and small-cap segment, where disclosure is thinner, coverage is patchy and a single site visit or channel check can still tell you something the screen does not. That is where research matters more today. Less maintenance coverage, more primary work, forensic accounting, supply chain checks and management access. Research that is genuinely differentiated is being paid for. Research that is not is being replaced by an index fund, and that is a reasonable outcome.