Bernstein's Rupal Agarwal has recommended that investors maintain a neutral stance on Indian equities, advising against keeping them "underweight" in portfolios despite near-term market challenges. In her latest note released on Friday, January 9, Agarwal emphasized that Indian equities present a balanced risk-reward setup that warrants careful consideration.

Market Performance and Recent Volatility

Indian markets have experienced significant selling pressure recently after reaching record highs at the start of the year. The impact has been substantial, as demonstrated by Thursday's market performance:

Near-Term Challenges Identified

Agarwal has outlined several potential headwinds that Indian markets may face in the coming period. These challenges include stretched valuations across various segments, a potential rise in risk-premium that could affect investor sentiment, and a challenging stock-picking environment that may complicate investment decisions. Additionally, the lack of macro recovery and better valuations for defensive-tilted stocks present further concerns for market participants.

Positive Tailwinds Supporting Market Outlook

Despite the challenges, Bernstein's analysis identifies several favorable factors that support a balanced view of Indian equities:

• Strong earnings recovery cycle heading towards potential upgrades
• Reasonable relative valuations compared to historical levels
• Low long-term earnings growth expectations providing room for positive surprises
• Potential return of foreign capital to Indian markets
• Resilient domestic flows maintaining market support
• Likelihood of US-India trade deal benefiting bilateral economic relations

Earnings Season Developments

The third quarter earnings season has commenced with early reports from companies such as GM Breweries, while IREDA reported results on the same day as Agarwal's note. The focus will shift to major index constituents as Nifty 50 companies begin their earnings announcements:

The earnings reports from these major IT companies will be particularly significant given their substantial weightage in the Nifty 50 index and their role as bellwethers for the broader technology sector's performance during the quarter.

Indian benchmark indices Sensex and Nifty are expected to open with a positive bias on January 9, despite extending losses for the fourth consecutive session. The GIFT Nifty was trading higher at around 26,011 points, indicating a firm opening for domestic markets.

Market Performance on January 8

Bears maintained their grip on Dalal Street as Indian equity benchmarks faced broad-based selling pressure across sectors. The markets were weighed down by persistent foreign institutional investor outflows, concerns over potential US tariffs, and rising geopolitical tensions.

The Nifty slipped near the 25,850 mark during intraday trading, reflecting the challenging market conditions that have persisted over recent sessions.

Fund Flow Dynamics

Foreign and domestic institutional investors showed contrasting behavior on January 8, with domestic investors providing crucial support to offset foreign selling pressure.

This marked the fourth consecutive session of FII selling, while DIIs continued their supportive stance by purchasing equities worth approximately ₹3,701 crore.

Global Market Overview

Asian equities displayed mixed performance, swinging between modest gains and losses as investors positioned themselves ahead of the US payrolls report and awaited a possible Supreme Court ruling on Trump's tariffs.

Wall Street ended with mixed results on Thursday. The technology sector faced pressure with Nvidia and other tech stocks declining, while defense companies advanced following Trump's announcement of an enlarged $1.50 trillion military budget.

Currency and Commodity Movements

The US dollar strengthened at the start of the Asian session on Friday, rising for the third consecutive day. The dollar index advanced 0.20% to 98.91 as traders awaited the latest US jobs report and prepared for the Supreme Court decision on Trump's emergency tariff powers.

Most Asian currencies traded lower in early Friday trade, with the Philippines Peso leading the decline, followed by the Malaysian Ringgit and Indonesian Rupiah. The Chinese Renminbi was the exception, avoiding the broader regional weakness.

In commodities, oil prices extended gains as investors monitored developments in Venezuela and Iran, while silver fell for the second consecutive day amid positioning for annual rebalancing of commodity indexes.