Foreign Investors Remain Underweight on India, Cautious Amid Global Market Volatility

Kotak Institutional Equities' Annual Investor Conference Highlights

Key Takeaways

Foreign investors remain underweight India, awaiting a deeper market correction or fresh inflows into emerging market funds before increasing allocations.
Strong global interest in India was reflected in the participation of 984 investors across 240 institutions and 246 companies at the four-day conference in Mumbai.
Many foreign investors attended to update themselves on the market rather than deploy capital immediately, with some citing India's slowing growth and relatively expensive valuations as concerns.

Sectoral Concerns

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The Indian IT services industry faces potential disruption from artificial intelligence (AI), with many US investors questioning companies about job losses and lower demand for traditional outsourcing services.
Investors remain unconvinced about the impact of AI, with the Nifty IT index falling 17% in the past month, compared to a 5% decline in the broader Nifty.
Some investors are looking at beneficiaries of rising data centre demand in India, including companies linked to power utilities, transmission equipment, and backup power systems.

Domestic Market Trends

Domestic investors, particularly those managing small- and mid-cap funds, are increasingly worried about illiquid small- and mid-cap positions in their portfolios.
Valuations in many small- and mid-cap stocks remain stretched, despite corrections in broader indices this year.
Kotak Institutional Equities believes there may be limited upside for the Nifty in the near term due to elevated valuations.

Market Outlook

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Kotak Institutional Equities estimates the Nifty is trading at around 20 times March 2027 earnings, still at a significant premium to the MSCI emerging markets index.
Key downside risks include a prolonged Middle East conflict leading to higher oil prices, a sharper global slowdown, a weak monsoon, or a slowdown in domestic retail inflows into equities.
Sectoral preferences include large private banks and NBFCs, life insurers, telecom, domestic-focused pharma and healthcare, non-ferrous metals, residential real estate, and airlines/hospitality, while remaining cautious on several consumer stocks as well as oil and gas and chemicals.

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Investor Takeaway