Indian equity markets continue to struggle with foreign investor outflows despite underlying corporate performance showing signs of stability and improvement. Market expert Sandip Sabharwal attributes the current weakness to momentum-based global asset reallocation rather than deteriorating fundamentals.

Foreign Fund Reallocation Drives Market Sentiment

Sabharwal explained that active foreign investor funds are systematically reallocating capital away from India toward other emerging markets. "Money is going into many other markets—Korea, Hong Kong, Brazil—so many markets are getting money, but India is seeing outflows," he noted. This trend-driven movement could persist despite company-level data suggesting a different narrative.

Corporate Earnings Show Resilience Across Sectors

Recent quarterly results from key sectors indicate underlying business stability contradicting market pessimism. Banking performance has been particularly encouraging, with results from major private sector lenders suggesting improved momentum.

The cement sector showed notable strength with overall demand rising 9-10%, representing healthy industry growth. UltraTech Cement specifically reported volumes growing faster than the broader industry during the third quarter.

Market Correction Creates Investment Opportunities

Sabharwal emphasized that current market conditions present buying opportunities rather than reasons for exit. "Many stocks are much cheaper than they were a month or three months back. In mid- and small-caps, some companies may be nearly 50% cheaper today," he observed. The correction has made valuations more attractive across market segments, though stock selection has become more complex following the broad earnings reset.

Selective Stock Recommendations Across Sectors

Among large-cap stocks, Sabharwal highlighted specific investment candidates based on valuation and performance metrics:

Banking Sector:

• Axis Bank: Attractive on both valuation and performance parameters
• ICICI Bank: Quality franchise despite recent number softness causing stock correction
• SBI: Only public sector bank recommendation due to concerns about other PSU banks

Other Sectors:

• Larsen & Toubro: Strong large-cap candidate
• Godrej Consumer Products: Potential 15-20% return over 12-15 months based on management commentary

Commodity Market Concerns and Global Diversification

Sabharwal warned about extreme movements in commodity markets, particularly precious metals. "Gold moving up 2-3% every day and silver moving 5-10% every day is completely unsustainable," he cautioned, comparing current conditions to the 2000 technology bubble. He expressed concern that retail investors exiting equities after losses might now be chasing commodities at stretched valuations.

Earnings Growth Outlook and Banking Sector Dynamics

Looking ahead, Sabharwal expects meaningful earnings rebound in FY27 as inflation rises from near-zero levels to 3-4% as indicated by RBI projections. "When inflation is zero or 1%, you cannot expect 15% earnings growth. Next year, 14-15% earnings growth over a low base is realistically possible," he projected.

Regarding public sector banks, Sabharwal noted structural challenges including declining deposit market share from 63% five years ago to 54-55% currently, potentially raising funding costs and hurting competitiveness. These factors reinforce his preference for private sector banking stocks and selective approach to PSU bank investments.

Indian equity markets face mounting challenges as earnings growth expectations continue to moderate, with industry experts warning of prolonged underperformance compared to global peers. Dhiraj Agarwal, Managing Director at Ambit Investment Managers, has expressed concerns about India's ability to achieve robust earnings growth in the current fiscal environment.

Earnings Growth Projections Fall Short

Agarwal believes India's earnings per share growth will likely remain below 10% in FY27, despite consensus estimates projecting around 17% growth. This projection stands in stark contrast to global markets, where several regions are expected to deliver significantly higher earnings growth.

The pattern of earnings downgrades has become a recurring theme for Indian markets. FY26 began with earnings growth expectations of 16-17%, which subsequently declined to 7% by year-end. Agarwal noted that marginal downgrades have already begun appearing for FY27, with no significant upgrades materializing.

Market Pressures and Structural Challenges

Several factors are contributing to the subdued outlook for Indian equities. Continuous foreign portfolio investor outflows have created sustained pressure on market performance. Additionally, the combination of increased IPO supply and limited domestic inflows has made market recovery more challenging.

While valuations have corrected from previously stretched levels, the fundamental demand environment remains concerning. The anticipated boost from Goods and Services Tax cuts implemented in September proved short-lived, lasting only four to six weeks before cooling off.

Budget Impact Expected to be Minimal

Regarding the upcoming Union Budget, Agarwal anticipates limited market impact, describing it as "more of an accounting exercise." With nominal GDP growth projected at 8.50-9.00%, he expects the government to maintain fiscal discipline, leaving little room for aggressive spending measures.

Key budget considerations include:

• Maintaining fiscal discipline amid growth constraints
• Limited scope for aggressive spending initiatives
• Reduced significance of budget announcements on market movements
• Expected short-lived volatility from any budget-related developments

Investment Strategy Implications

The challenging earnings environment suggests investors may need to recalibrate expectations for Indian equity returns. The persistent gap between initial earnings projections and actual delivery indicates a need for more conservative growth assumptions. Market participants are advised to focus on companies with sustainable business models and strong fundamentals rather than relying on broad market momentum.

The combination of earnings pressure, foreign investor outflows, and weak demand trends suggests that Indian markets may continue to face headwinds in the near term, requiring careful stock selection and risk management strategies.