Indian equity markets are navigating a challenging phase marked by prolonged underperformance, driven by multiple headwinds including global risk-off sentiment, muted earnings growth, and persistent foreign investor selling. Anand Shah, CIO – PMS & AIF Investments at ICICI Prudential AMC, attributes the sharp weakness seen in January as an extension of trends that dominated the previous year.

Global Headwinds Impact Indian Markets

India significantly lagged global peers such as Korea and Taiwan as global capital gravitated towards artificial intelligence-led themes. Shah noted that India is clearly seen as an anti-AI play, with Foreign Institutional Investors (FIIs) selling Indian equities and rotating into markets aligned with AI and technology sectors.

Global uncertainty around tariffs, currency debasement, and geopolitical negotiations has further strengthened demand for precious metals, reinforcing a risk-off environment that continues to weigh on Indian equities.

Earnings Slowdown and Recovery Trajectory

Beyond global headwinds, Shah highlighted a domestic earnings slowdown as a key factor behind market weakness. The earnings performance shows a notable shift from previous years:

Shah expects earnings growth to normalize to around 10–12% in FY27 and FY28, broadly in line with nominal GDP growth.

Bottom-Up Stock Selection Takes Center Stage

As a result of these dynamics, Shah believes 2026 will be a market driven less by broad index moves and more by bottom-up stock selection. He observed clear divergence within sectors, noting that even in domestic consumption, companies are behaving very differently. The metals sector serves as a recent example where long-ignored value stocks rallied after triggers such as rising non-ferrous prices and safeguard duties.

Portfolio Strategy and Investment Approach

On portfolio strategy, Shah emphasized discipline over market timing, advising investors to:

• Continue systematic investment plans (SIPs)
• Adhere to asset allocation frameworks
• Use volatility as an opportunity to rebalance portfolios
• Consider selective reallocation towards equities from precious metals

Shah noted that the biggest opportunities usually come when there is no good news, stating that periods of pessimism are often the right time to invest in equities. He also reiterated the case for a multi-asset approach, highlighting that Indian households remain structurally overweight real estate and gold, while equities still form a relatively small share of household assets.

Sector Preferences and Strategic Positioning

Despite a 12–15 month correction in mid- and small-cap stocks, Shah cautioned that valuations remain a challenge. India's relative underperformance has been driven more by global markets rising sharply than by meaningful domestic correction.

Preferred Sectors

Key Underweights

• Consumer Staples: Rich valuations and rising competition from D2C brands
• IT Services: Structural risks from AI and valuation concerns despite recent underperformance

Auto Sector: Complex Transition Dynamics

Shah described the auto sector as complex, shaped by two major transitions – the shift from internal combustion engines to electric vehicles, and premiumisation driven by rising incomes. These transitions have created clear winners and losers, with SUVs growing much faster than the overall market. Free trade agreements could introduce further challenges and opportunities in this space.

Overall, Shah believes investors should prepare for a year where careful stock selection, valuation discipline, and asset allocation will matter more than chasing macro themes.

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.