What is your outlook for Indian equities?

The recent 90-day pause on elevated US tariffs, barring China, is a clear positive for global supply chains. Unlike demand shocks seen in 2008 or during the Covid crisis, this was a supply-side issue, and the market will welcome its temporary resolution. Over time, we expect a series of trade realignments, where India could emerge as a net gainer in areas like electronics, specialty chemicals and manufacturing, as global players diversify away from China.

Indian equities have enjoyed a strong rally over the past four years, making a correction inevitable at some point. However, I view this as a pullback within a structural bull market, rather than the start of a bear phase. While headwinds exist, India’s banking system remains robust, corporates are deleveraged, and despite a slowdown in the property market, developers have fortified balance sheets.

With six months of correction already behind us, the Indian stock market should get back in shape in another three to six months. By then, we should have greater clarity on the “Trump Trade” and the trajectory of India’s consumption story, potentially setting the stage for the next phase of the rally.

What is your take on valuations at this point in time?

Valuations have seen a meaningful correction over the past six months. Currently, trading multiples are below their median levels across time frames of 5, 10 and 20 years. But we are not yet at deeply discounted levels, especially when you’re staring at certain domestic and global headwinds. India continues to trade at a premium relative to most EMs, which has historically been supported by higher return on equity performance. However, we are now nearly one standard deviation below our usual premium versus the broader EM index.

At this stage, large caps appear relatively better positioned than mid and small caps. While many mid- and small-cap stocks are in oversold territory, many still continue to trade at premium valuations. For stock pickers with a keen eye for quality, select opportunities in mid- and small-cap segments could still outperform large caps.

Going forward, what is the outlook for FPI flows?

Global sentiment is already showing signs of a turnaround, with capital flows into EMs moving above historical averages. US equities have entered a corrective phase, driven by recession fears and concerns over China’s technological advancements. The narrowing valuation gap between developed markets and EMs, along with improving earnings growth in EMs, suggests a potential rebalancing of global investment flows.

For India, the sharp depreciation phase of the rupee appears to be behind us, and with US bond yields softening, the FII sentiment is likely to improve in the months ahead. FIIs have already been increasing their exposure to Indian debt, reflecting growing confidence in the country’s macroeconomic stability. With banking liquidity improving, a few additional triggers, such as better earnings visibility and a revival in consumption, will help decisively turn sentiment.

What is your take on earnings growth for India Inc for Q4 and the next few quarters?

Q4 FY25 earnings for Nifty 50 companies will likely remain flat on year-on-year (y-o-y) basis (excluding OMCs). The slight positive rub-off will be on account of rural green shoots and government spending on capital expenditure in second half of the financial year. A potential downside risk is further earnings downgrades, which may not be fully priced in yet.

For FY25, Nifty earnings growth is expected to moderate to about 7 per cent y-o-y, significantly lower than the 17 per cent CAGR recorded over FY20-24. However, with this lower base in place, FY26 earnings growth could rebound to 10-13 per cent. Q1 FY26 may remain soft, given the current economic cycle. Q2 FY26 onwards, earnings momentum should improve, supported by the low base effect and government spending.

What are the sectors that you find favourable right now?

We are optimistic about the electronics manufacturing theme, as a significant portion of India’s current imports is being replaced by domestic production. With strong government support through incentives, the sector offers clear long-term growth visibility for companies.

The hospitality industry is also thriving, driven by rising occupancies and higher room rates. Additionally, increased bookings for events and conferences have become a substantial revenue driver. Many hotel chains are further enhancing their return ratios by adopting an asset-light expansion strategy, ensuring sustainable growth with lower capital investment.