Despite the MSCI India index declining 15.6% in dollar terms for the year to date, Jefferies has maintained a slight overweight position on India in its Asia Pacific ex-Japan portfolio. According to the October 9 issue of Jefferies' quarterly Asia Maxima report authored by Chris Wood, the brokerage's allocation recommendation for India is 12.0%, as opposed to 10.5% for India in the MSCI AC Asia Pacific ex-Japan index. The dollar decline represents a 6.2% decrease in the value of the Indian rupee for the year to date, with the Nifty index down 13.4% in local currency terms. Among all markets evaluated in the report's regional rankings, India ranks as the second worst performing market (behind Indonesia), having lost 42.3% of its value. The MSCI Emerging Markets Index has increased by 21.4% in dollar terms this year, while MSCI India has declined by 15.6%, creating a 37 percentage points difference.
Despite the benchmark indices ending at multi-year lows, Jefferies reports that smaller stocks have continued to outperform the big caps this year in spite of higher valuations. The Nifty MidCap 100 Index is trading on 22.9x 12-month forward earnings, compared with 17.0x for the Nifty. The Nifty MidCap 100 Index has declined by 1.9% year-to-date but is up 88% since the start of 2023, while the Nifty is down 13.4% year-to-date and up 25% since the beginning of 2023. As reported by Jefferies, the top 20 stocks' share of India's market capitalization has decreased from 44% in 2020 to 27%, which is the exact opposite of the global trend given the surge in passive investing. This dynamic explains why the key benchmark indices - Nifty 50, Sensex and Bank Nifty - are in the red year-to-date for the last two years.
Wood's report highlights bank credit expansion of 18.1% on a year-over-year basis as of mid-September, which was "much better than anyone was expecting at the start of this year." Corporate loans increased by 21.6% during August, while loans to small, medium-sized, and micro industrial enterprises expanded by 25.5%. Deposits expanded by 17.3%, with the report noting that this growth rate was "much better than anyone was expecting at the start of this year." The pickup in corporate lending suggests that the long-anticipated private sector capital expenditure cycle may finally be occurring, with Jefferies interpreting this as an indicator of investment. Machinery imports totaled $66 billion in the 12-month period ending August, compared to $29 billion in fiscal year 2021. The annualised nominal gross fixed capital formation-to-GDP ratio has increased from a recent low of 31.4% in the four quarters to December to 32.4% in the four quarters to June. Jefferies expects India to achieve 6.5-7% real GDP growth and approximately 11-12% nominal GDP growth in the fiscal year ending March 31, 2027.
The most significant change involves Reliance Industries, which now commands 7.5% weightage in the Jefferies Model Portfolio. As reported by Jefferies, the stock is trading at 8.4 times its one-year forward EV/EBITDA multiple, representing a 23% discount to its 10-year average. The firm cited possibilities of earnings upgrades and higher Gross Refining Margins (GRMs) as key factors behind the increased allocation. The stock's attractive valuations and operational improvements prompted the strategic positioning, with the brokerage noting that large caps, which are below average valuations, may offer hiding places during the current market environment. The latest report emphasizes that Reliance is included in the portfolio with stock at attractive valuations and upgrade possibilities on higher GRMs.
Despite the positive fundamentals, Jefferies attributes MSCI India's underperformance to heavy share issuance serving as the primary constraint on upside potential. During 2026, domestic equity mutual funds have received approximately ₹38,800 crore ($4.1 billion) per month on average, but these inflows continue to be absorbed by equity issuance which has picked up again in recent months. Monthly equity issuance declined to $1.0 billion during April following the outbreak of the Iran War, but subsequently increased to $9.5 billion during August. The Nifty MidCap 100 Index has declined by 1.9% during 2026 as opposed to 13.4% for the Nifty Index, but the Nifty MidCap 100 Index is trading at 22.9 times its projected 12-month forward earnings, whereas the Nifty Index is trading at 17.0 times its projected 12-month forward earnings. Jefferies maintains that MSCI India is still trading at a premium to all other markets in the region, with the top 20 stocks' share of India's market capitalization decreasing from 44% in 2020 to 27%.
