Sustained foreign investor selling and stretched valuations are creating significant risks in Indian equities despite headline index resilience, according to Ajay Srivastava, Managing Director at Dimensions Corporate. Speaking to ET Now, he emphasized that overseas investors have sold nearly ₹2.74 lakh crore worth of Indian equities, representing a crucial signal that domestic investors should not ignore.

Foreign Selling and Valuation Concerns

Srivastava highlighted the scale of foreign investor exodus as a key warning signal for the market. "When global investors vote with capital at this scale, it means they see better risk-adjusted opportunities elsewhere. You need to heed that signal," he explained.

The market expert expressed particular concern about the current risk-return profile of Indian equities:

"If you take equity risk and get 10% returns, which is close to FD rates, it does not make sense," Srivastava noted, adding that several Indian stocks continue to trade at valuation levels rarely seen globally.

Strategic Sector Recommendations

Rather than chasing new investment themes, Srivastava advocates focusing on sectors with strong competitive moats and policy support. His preferred sectors for 2026 include:

• Automobiles: Benefiting from GST cuts and policy support
• Metals: Supported by favorable tariff policies
• Select Banks: Strong fundamentals and regulatory backing
• Telecom: Limited competitive landscape despite policy sensitivity
• Stock Exchanges: Structural advantages and growth potential

"In India, fortunes change dramatically with policy decisions—GST cuts helped autos, tariffs lifted metals. This will continue," he emphasized, dismissing IT as a near-term opportunity due to structural weakness after tax incentive withdrawals.

Q3 Earnings and Sector Outlook

For the December quarter earnings, Srivastava expects strong performance from specific sectors:

He particularly highlighted pharma and CDMO companies as beneficiaries of rupee depreciation against the euro and pound, while warning that consumer discretionary segments could disappoint as "household spending has shifted toward autos and travel."

2026 Investment Strategy

Srivastava maintains a disciplined asset allocation approach for 2026, recommending equal weightings across three categories:

Within Indian equities, he emphasizes "pedigree companies" with long operating histories, strong governance, and proven execution capabilities. "2026 is about pedigree, not themes. Pick companies that have delivered consistently for five to seven years," he advised.

Srivastava also advocates for concentrated portfolios, stating that "your top 10-20% holdings decide returns. Spreading capital across 50 stocks achieves nothing." He believes scarcity matters more than valuation in sectors like defense, where execution rather than order books represents the real challenge.

Samir Arora, Founder of Helios Capital, believes India's equity markets should welcome strong domestic institutional investor flows rather than worry about allocation constraints, dismissing concerns around "too much money chasing too few stocks" as premature ahead of a broader market rally expected in 2026.

Markets Need Rally Before Allocation Concerns

Speaking to ET Now as part of an Outlook 2026 interaction, Arora argued that investors should focus on market performance rather than flow dynamics. "We worry about weak markets, not strong markets. Strong markets are meant to be enjoyed," he said, emphasizing that equity investing follows cyclical patterns with alternating phases of inflows and consolidation.

Arora dismissed the idea that sustained DII inflows could become problematic if foreign institutional investor selling tapers, noting that market performance must be viewed as a continuum rather than through selective timeframes.

Platform Companies Over Traditional Consumption Themes

Arora highlighted new-age platform companies as superior vehicles for capturing India's consumption growth compared to traditional consumer staples, where end-demand growth typically remains capped at high single digits. He emphasized that platforms benefit from channel shift rather than overall consumption expansion.

"These companies don't grow because the consumer is growing at 20%. They grow because the consumer is choosing a new channel. That penetration can rise sharply for years," Arora explained, citing digital payment platforms such as PhonePe and Paytm as examples.

Caution on Long-Duration Government Themes

On sectors such as railways and defence, Arora expressed skepticism about investment narratives built around long-duration government programmes. Helios Capital prefers businesses with year-to-year earnings visibility rather than companies dependent on multi-decade execution cycles.

While acknowledging that defence offers some visibility due to government-led localisation, Arora said the firm avoids companies tied to 10- or 15-year projects with uncertain execution timelines. Among defence names, Helios holds Bharat Electronics, citing its diversified, recurring order flow rather than dependence on single large programmes.

Financials Performance and NBFC Leadership

Addressing perceptions that financials have underperformed, Arora noted that non-bank lenders have delivered strong returns in recent periods. Rate cuts have particularly favoured NBFC margins, supporting outperformance in this segment.

Arora attributed ICICI Bank's relative weakness to management succession concerns rather than fundamental issues, while highlighting that stocks such as Bajaj Finance, Cholamandalam Investment, and Shriram Finance have significantly outperformed.

Selective Auto Exposure Strategy

On automobiles, Arora revealed that Helios is currently avoiding original equipment manufacturers and instead prefers auto ancillary plays. The firm was an anchor investor in Ather Energy, reflecting its preference for selective exposure rather than broad bets on passenger or commercial vehicle cycles.

Constructive 2026 Outlook

Arora remains optimistic about Indian equities for 2026, particularly if foreign investor selling stabilises and earnings visibility improves. He believes platform-led consumption, select financials, and businesses with clear year-to-year growth drivers offer better risk-reward profiles than theme-based or execution-heavy sectors.

"We want visibility, scalability and changing consumer behaviour—not 15-year promises," Arora concluded, emphasizing his preference for businesses with demonstrable near-term growth catalysts over long-duration thematic plays.