Despite some strong cues from the domestic economy, and that exports to the US account for only 2% of India’s GDP, the ongoing trade negotiation with the US poses a significant risk to the market.
“Markets today are pricing in that better senses will prevail,” he said, but if that assumption fails, “undoubtedly upside is capped and there is room for downside.”
Two things that could trigger the next stocks rally in India, according to Shah, are return of foreign portfolio investors (FPI) and recovery in corporate earnings. FPIs have been net sellers in the Indian stock market in five out of last seven months, reducing their investments in India by over ₹77,753 crore as of August 5.
Nearly $2.8 billion have been redeemed from funds investing in India this year, according to data from EPFR Global. There have been consistent outflows of $70 million to $200 million per day from dedicated India funds since July 28, according to Cameron Brandt, Director of Research at EPFR Global, as the trade negotiations between the US and India turned soured.
As of last week, three out of four India’s blue-chip companies have reported earnings and the numbers were less than exciting, overall. Mumbai-based financial services firm Motilal Oswal cut its estimated earnings per share for the Nifty 50 companies by 1.1% to ₹1,110 for the financial year FY26, citing 55 earnings shocks compared to just 32 surprises.
“How big is the gap (between FY26 and FY27 earnings) will probably determine the next up move,” Shah explained.Sectors such as chemicals and textiles may face more pressure, but domestic stimulus may offset some of the hit, according to Shah. It may be safer to bet on companies that rely more on domestic demand.
There’s a growing consensus that the Indian government may try to boost local consumption, which contributes over 60% to India’s gross domestic product (GDP), to counter global uncertainties. Benign inflation may support a recovery in consumption, particularly in the lower income segments, which has been weak for a while.
The ongoing talks for a reduction in goods and services tax (GST) and a salary hike for government employees may boost demand for companies that make consumer products as well as those related to travel.
The outlook for carmakers is not even. Increasing layoffs in formal jobs have hurt demand for cars while two-wheeler sales have recovered as rural demand remains on an upswing. Shah prefers auto component makers, particularly those making parts for electric vehicles.
For the entire interview, watch the accompanying video
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