Dear Investor
Global markets continue to be buoyant while India continues to struggle and continues to figure among relatively weaker performers globally.
We believe that following are the reasons for the same:
- Continuous currency depreciation: USD has been weakening against a slew of currencies. DXY which measures the strength of the USD has been weakening and is now under 100. Weakness in the USD is contributing to inflows into countries with strong currencies and supporting those markets. However, Indian Rupee is among the relatively weaker currencies globally and is weakening against the USD as well. Hence our markets are not seeing the benefit of a weak USD. Currency depreciation may continue to be influenced by weak exports in high value-added spaces on high US duties.
- Momentum chasing: Many emerging markets are performing well, while India has faced challenges. India is amongst the top allocation in an Emerging market portfolio. As it happens in any portfolio, if one of the top allocations doesn’t work, then the pressure to re-allocate may increase to avoid underperformance, especially when other top allocations are doing well. This appears to be occurring and is contributing to continued selling.
- Relative valuations have improved but can be cheaper: While India has been amongst the weaker-performing markets of last 12 months and has seen relative valuations drop back within long period valuation range, low valuations could remain a consideration for long term offshore investors. More stable policy framework and lower taxation could be supportive.
- Lower presence of in-focus growth spaces such as AI: FPIs look at emerging markets for growth. Today’s growth themes are largely led by AI. India currently has limited listed exposure to strong AI plays. Money is hence going to other markets with better presence of these growth themes. One thing is leading to other. Negative FPI flows may be impacting growth spaces which are doing well globally such as defence, new tech, EVs, renewables etc.
- Strong fund raise from the market: Indian market is witnessing an elevated momentum of fund raise from the market. Companies are raising money, PEs, early investors and promoters are also selling. As a percentage of market cap, it is relatively high compared to several global markets. The fund raise momentum is more than the momentum of new money into the market and is forcing sale of existing holdings to fund exposure to new entrants to the market. This is causing narrowing of market breadth.
- Reduced domestic HNI and retail interest: Domestic money has continued to come into funds. However, if we look at the data, there has been a moderation in retail money flow into the market. This may be because of low returns, selling to fund losses in derivatives, relative strong performance of gold and silver and movement of money to that asset class.
What is expected to improve situation going forward?
- Re-emergence of earnings growth: Q2 saw corporate India deliver numbers above market expectations and Q3 can be an encore. This could restore confidence in investors.
- Correction in valuations: Larger cap indices have moved up around 10% over past one year with a commensurate change in earnings and have maintained valuations. However, broader market has seen a better earnings growth and indices have performed relatively weaker, leading to a valuation correction. This correction is more pronounced in the high growth spaces. In some sense, high growth spaces appear relatively better valued. The valuation comfort may support performance once market stabilizes.
- Currency stabilization: This may happen when we get a favourable trade deal with the west. Deal with EU seems to be around the corner. It may help spaces like textiles. If a deal with US also emerges, it could influence sentiment. US is one of the biggest allocators of money. Other markets have seen positive moves after a deal with the US and we could see the same. Good deals with west can start a virtuous cycle of world taking note potentially leading to stabilization of INR leading to us also participating in global capital flows. Inflow of global capital may provide more confidence to domestic capital sitting on the fence to come in, and influence the demand supply equation. This could result in our markets also participating in the rally seen across the globe.
For growth investing, a lot of enablers already exist. Interest rates are relatively low in India and the west, inflation is low and oil prices are low. Earnings momentum in the index constituents is relatively muted, while strong growth continues in growth spaces and it can continue during this result season as well. Ultimately as things fall in place, we do expect markets to follow earnings growth. The period till March 15 has historically proved to be a good entry point for investors. Most years have seen relatively strong performance in next 9.5 months’ vs the first 2.5 months. Investors could use this insight to their advantage.
Time for Alpha
We have believed that this period is a period which may offer alpha generation possibilities because growth quotient in the index in general and index heavy weights in particular has been weakening. At the same time new growth areas have been emerging with new leaders. Old order is slowly giving way to the new. This is a combination that may be relevant for alpha oriented strategies.
However, over the past year alpha generation has been weak and most of our older funds have lagged. Even over fiscal till date our funds have lagged the index.
This is because while structurally the alpha tailwinds are strong, yet over last one year there have been head winds. Currency weakness has meant that off-shore investors have been strong sellers and global growth themes have not manifested themselves in India to a meaningful extent. Global themes such as renewables, defence and new tech did not manifest themselves in the country. Indian market has been delinked from global trends in 2025. Breadth of the market has remained relatively narrow for reasons discussed earlier.
As time goes by, past growth themes can lose their zing and new themes can emerge. At Motilal, we have tried to incorporate new themes such as circular economy and EVs in our portfolios. At the same time we have reduced exposure to spaces such as EMS and renewable energy to make space for newer spaces. Spaces which had done well and were facing valuation headwinds have also been pared down. We have increased exposure to select NBFCs and also included select mid sized banks where growth quotient is relatively higher. New tech exposure has been increased. At the same time, overall market cap of the fund has seen an increase as we have tried to focus on relatively larger cap companies.
While new themes can emerge, many of portfolio names have seen earnings growth and have seen a valuation correction. Moreover, some have adapted to benefit from new opportunities. We believe that some of these names may contribute to performance over the next period.
While the headwinds can continue, we do believe that improvement should be around the corner and could coincide with currency stability and trade deals.
Over the next one year, in the back drop of prevailing growth factors such as low inflation and interest rates, as the headwinds sort themselves out over time, we think following spaces may have long period earnings growth potential
- New tech on continued growth momentum as players substitute traditional ways,
- Defence on sustained demand on account of higher threat perceptions globally,
- Renewables on improved power demand as home AC demand and data centres and Make in India initiatives start growing,
- EVs as charging infra is rolled out and a critical mass of customers begins to adopt the technology,
- Circular economy participants as countries try to reduce environment impact and seek rare minerals,
- Capital market players on general market buoyancy, and
- Chemicals on improved sentiment towards commodities on lower Chinese export incentives, and
- Fast growing NBFCs and banks could contribute to performance
While the world has celebrated high growth spaces in 2025 after a strong 2024, Indian high growth spaces were probably amongst the weaker performing asset class globally in 2025. Even if there is a reversion to mean, it could prove to be a year for alpha.
Source: MCX India, Bloomberg, MOFSL, RBI, NSE Indices, MOAMC Internal. Data as on Jan’26.
Disclaimer: This note has been issued based on internal data, publicly available information, and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. These statements are based on current market conditions, which may change, and past performance is not indicative of future results. The Stocks/Sectors mentioned herein are for explaining the concept and shall not be construed as investment advice to any party. The information/data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. The views expressed above are those of the MD and CEO of the AMC and are based on current market conditions and informational purposes only and should not be construed as investment advice. The term ‘alpha’ is used in the context of broader market opportunities for differentiated performance through stock selection. It does not indicate or guarantee outperformance by any specific mutual fund scheme. All opinions, figures, estimates, and data included in this article are as of date. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses, and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those expressed or implied in such statements. This material does not compare or promote any specific investment product or strategy over others. References to investor flows or macroeconomic factors are for informational purposes only and should not be construed as market predictions or investment recommendations. Past performance may or may not be sustained in the future. Readers shall be fully responsible/liable for any decision taken based on this article. Investments in the securities market are subject to market risks, read all relevant documents carefully.
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