ETMarkets Smart Talk | Nifty in ‘bounce zone’ as valuations fall below 10-year average; de-escalation key: Harendra Kumar

Q) Thanks for taking the time out. FY26 returns have turned negative due to geopolitical concerns around West Asia. How do you sum up the financial year?

A) FY26 was a year in which resilient domestic macro-economic fundamentals were overshadowed by external shocks. US reciprocal tariffs, AI disruption for Indian IT stocks and now the West Asian crisis has hemorrhaged the markets.

Given that the shocks are exogenous – flows have been severely impacted. Outflows at USD 19.7bn has been debilitating. However, there is a silver lining.

With all the noise of the INR depreciation and resultant worries – it has become reasonably valued. The trend of outflows should reverse at some point during the fiscal given this backdrop.

Live Events

Q) As we head towards FY27, what are the key triggers investors should keep in mind that could lead to a market reversal or return of bullish sentiment?
A) Over the last two years valuations had been our Achilles heel. After the sharp cuts – the Nifty is in a bounce zone. At ~17.3x, Nifty trades 7% below its 10-year average of ~18.6x, placing it in a historical “bounce zone”.

Outside of extreme disruptions like COVID-19, this level usually acted as a floor for valuation. Even during the Russia–Ukraine conflict, despite Brent sustaining above USD 100/bbl, Nifty multiples bounced back from 10-year rolling averages.This is a big positive. With strong fundamentals – a quick de-escalation should see a whipsaw in the markets.

Q) Which sectors should be on investors’ radar for FY27?
A) Large-cap auto stocks, have corrected sharply, witnessing a ~17% drawdown since the onset of the US-Iran conflict. While near-term concerns persist around input cost pressures from elevated commodity prices and potential demand moderation in the event of a prolonged conflict triggering an inflation shock for consumers, underlying retail data remains robust and encouraging.

Additionally, 18 out of the 19 utility stocks under our coverage have outperformed the Nifty 50 in current drawdown, underscoring the sector’s relative resilience.

The escalating conflict is expected to accelerate India’s electrification cycle, while surging data centre capex is driving incremental power demand.

This positive backdrop is further supported by the likely passage of the New Electricity Amendment Bill, which will unlock structural reforms in the sector.

Consequently, power generation, transmission, distribution, and data centre-linked plays are emerging not merely as defensive anchors but as clear structural beneficiaries in the medium to long term.

Q) How should one approach gold and silver in the new financial year?
A) Gold is store of value and should stay that way. At some levels its also viewed as hedge. There could be a bounce trade once the dollar starts to weaken again but beyond that I am not sure whether we are going to see a rally like last year.

For country that is witnessing strong nominal growth and emergence of new sectors – stronger compounding exists in equities.

Q) Do you think there are certain sectors that have already corrected and are now available at attractive valuations?
A) Beyond Auto and Power – IT services, Banks and real estate offer meaningful valuation comfort.

Banks trade at ~1.4x P/B (FY28E), a ~31% discount to their 10-year median. Autos, post the recent correction, are at ~19.5x, about a 5% discount to the 5-year median, offering an attractive entry point.

IT services also stand out, at ~16.4x FY28 P/E, the sector trades at a 20%/31% discount to its 10-year/5-year medians, respectively. With no material disruption to revenue streams and margins so far from the AI transition, the medium-term risk-reward appears attractive.

Q) How are we positioned against peers in terms of valuations?
A) India still trades at a premium to peers, but the gap has normalised meaningfully from 2024 extremes. The MSCI India premium to MSCI EM has moderated to ~60%, closer to its 10-year average, from peaks above 100% in August 2024, indicating that excess froth has largely been corrected.

Even so, on a 2-year forward P/E basis, India at 15.7x remains above MSCI EM at 10.3x. This premium is partly justified by stronger fundamentals.

India offers ~22% USD EPS CAGR over CY25–27E with ~15.7% ROE, at par with most global markets. In contrast, China trades cheaper but with lower returns (~10.4% ROE), while Korea’s low valuations reflect a more cyclical and concentrated earnings profile.

Overall, India remains a premium market, but the premium now appears more aligned with its growth visibility, return profile, and macro stability.

Q) Will FII flows reverse in FY27? How are you interpreting both domestic and global flows?
A) Our base case is that FII flows can improve in FY27, but a sharp, linear reversal looks less likely.

Domestic fundamentals are turning supportive: nominal GDP is recovering, earnings growth is broadening, valuation premiums have moderated, and trade-related overhangs have eased.

Historically, FPI flows have tracked nominal growth cycles, which supports a gradual return. A durable reversal in FPI inflows will require three conditions: softer energy prices, a stable rupee, and continued earnings strength. Until then, flows are likely to improve in phases and remain episodic in nature.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)