The Indian equity market is likely to remain sideways with muted return expectations as valuations and global opportunities could limit upside, according to Ambit Institutional Equities. Nitin Bhasin, head of institutional equities at Ambit, told PTI that Indian markets have recovered from the lows seen in March as domestic investors found valuations attractive, but the broader market outlook remains cautious. The firm has maintained its call that India is a sideways market for the last year-and-a-half or slightly more than that, since September 2024. Foreign portfolio investors (FPIs) are not finding India attractive in terms of valuations or earnings upgrades compared to opportunities available globally, with the market expected to remain sideways with low returns or a low downside.
Foreign portfolio investor (FPI) flows are unlikely to return to Indian equities in a significant manner, according to Ambit Capital. The institutional equities broking firm attributes this outlook to elevated valuations and stronger opportunities in developed markets, as reported by Business Standard. India's historical advantage of being relatively inexpensive compared to both developed and emerging economies has diminished, with investors now seeking better growth opportunities and superior returns on equity without paying excessive premiums. Bhasin noted that investors should not expect major returns from large-cap indices, adding that large caps are the most preferred over mid and small caps, with small caps being the least preferred due to earnings concentration in a sideways or slightly lower market environment.
Post-pandemic developments have significantly impacted India's attractiveness to foreign investors. According to Ambit Capital, systematic investment plan (SIP) flows have become structurally strong, and household participation in equities has increased dramatically. This surge in domestic money has led to more capital chasing limited listed opportunities, pushing valuations to levels that are expensive relative to India's historical experience. The firm notes that India was historically expected to deliver high single-digit or low double-digit returns in dollars, but if India becomes expensive and its expected returns moderate to perhaps 7-8 per cent or even lower over shorter horizons, capital naturally gets reallocated to more compelling opportunities. Bhasin emphasized that the market could remain sideways with low returns or a low downside, reflecting the current valuation concerns.
Developed economies are experiencing significant structural changes that are reshaping global investment flows. As reported by Ambit Capital, developed economies are undergoing a major reindustrialisation, while the AI revolution has opened entirely new avenues of growth. Nitin Bhasin explained that after more than a decade of near-zero interest rates, developed-market yields have also risen materially. This shift in global dynamics, combined with the rise of AI-related investments, is making opportunities in technology and industrial revival elsewhere more compelling for global investors. Bhasin noted that the easing of West Asia-related risks could lead to normalisation in some key economic factors, including crude prices, the rupee and bond yields.
According to Ambit Capital, large-caps are expected to remain relatively flat over the next 12 months and for small- and mid-caps (SMIDs) to underperform. Bhasin noted that there has been no meaningful correction in benchmark indices, and earnings growth appears likely to remain closer to 10 per cent, with a large portion of that growth coming from a relatively small set of sectors. The firm expects investors to gravitate towards businesses with more predictable cash flows and stronger balance sheets, as when investors recognise that broad-based earnings acceleration is absent, capital naturally gravitates towards quality and scale over speculation. On bond yields, Bhasin said yields are expected to normalise after recent volatility, with yields that were earlier expected to move closer to 7.4-7.5 per cent having settled around 7-7.2 per cent.
Despite the challenging outlook, Ambit Capital maintains selective preferences within the Indian market. The firm prefers defensive sectors such as fast-moving consumer goods (FMCG), pharmaceuticals, information technology (IT) and telecom, as reported by Business Standard. Bhasin added that big-tech initial public offerings (IPOs) could be another reason for foreign investor flows going elsewhere, as large companies such as OpenAI, SpaceX or Anthropic eventually list and gain index representation, potentially reducing the relative allocation available for emerging markets including India. On macro outlook, Bhasin highlighted that the factors to watch over the next month or two, even in the next two or three quarters, would be what happens to the crude import bill, which had actually shot up for a few months in India, noting that crude price normalisation would be an important factor for the Indian economy.
