Domestic Stock and Gold Buying Weighs on Foreign Investor Flows, Says Bandhan AMC's Gunwani

Indian equity markets face headwinds not from weak fundamentals but from a unique macroeconomic situation, according to Manish Gunwani, Head of Equity at Bandhan AMC. Strong domestic buying of both stocks and gold is creating balance of payments pressure, weakening the rupee and making foreign investors more cautious about Indian markets.

Currency Dynamics Impact Foreign Flows

Gunwani explains that heavy gold buying, given that most gold is imported, results in more dollars flowing out of the country, which weakens the rupee. Even when Indian companies perform well, a weaker rupee can eliminate foreign investors' returns in dollar terms. This cycle needs to break through either global dollar weakness or currency adjustment for foreign flows to turn supportive again.

Beyond currency concerns, India lacks a large, index-heavy artificial intelligence play compared to emerging market peers like China, Korea and Taiwan. The ongoing discussions around a US-India trade agreement have also raised India's perceived risk premium among foreign investors.

Small-Cap Optimism Over Large-Cap Concerns

After five years of outperforming nominal GDP, large-cap earnings are likely to mirror nominal GDP growth of around 10.00-11.00% over the next three to five years, suggesting limited upside from large-cap stocks. Gunwani takes a contrarian view on market segments:

"We definitely think the small-cap space is very interesting... we are more positive on small-caps today versus one year back," Gunwani stated. He argues that the wide universe, ongoing technological shifts and geopolitical changes create scope for differentiated winners. Despite tight liquidity potentially weighing on smaller stocks in the near term, he believes small-caps are the asset class most likely to outperform over a three-to-five-year horizon.

Sectoral Preferences and Strategic Positioning

Gunwani's sectoral preferences focus on global cyclicals and value opportunities. He finds metals and shipping particularly attractive, citing resilient growth in the US and signs of recovery in China following a prolonged downturn in the property sector. Within the lending space, he sees value in lenders trading at or below a price-to-book value of one, supported by strong household balance sheets and low probability of major asset-quality issues.

His approach to metals varies by segment:

• Gold finance: Considered expensive at current levels
• Industrial metals: Remain interesting investment opportunities
• Non-ferrous metals: Supported by US resilience, recovery in Europe and China, and increased global capex driven by protectionist policies
• Ferrous metals: More dependent on China's policy choices and could benefit from a strengthening yuan against the US dollar

Fund Management Approach

Bandhan AMC managed assets worth ₹609.27 crore as of December 31, 2025. Gunwani's strategy puts him at odds with peers who have been increasing allocations to large-cap stocks for capital preservation. His focus remains on long-term capital appreciation, highlighting that several small-cap stocks have the potential to double over the next three to five years. He advocates a gradual increase in exposure, acknowledging that timing the macro perfectly is difficult.