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Growing doubts about US growth have sparked a shift in global capital, with India emerging as a key beneficiary. At its peak, the US comprised nearly 70% of the MSCI All Country World Index, highlighting extreme concentration. As that narrative weakens, flows are diversifying, and India is seen as a relatively safe haven amid global realignments. However, growth is moderating—gross domestic product (GDP) forecasts have been cut by 50 basis points (bps) to around 6%, and FY26 Nifty earnings are expected to grow at a slower 12-13%, down from 18-20% annually between 2021–24. The recent rally appears driven by recovery hopes and the perception of India as a relatively safe investment destination.
“Yet, India has had the highest allocation in our portfolio for nearly three years, reflecting our confidence in its position in emerging markets,” Kelkar said, adding that he has maintained a steady 20% allocation, signalling long-term conviction rather than chasing short-term trends.
Edited excerpts:
What’s the mood like in global markets?
There’s now a visible shift in capital moving out of the US—a trend not seen for many years. When we used to pitch emerging markets or India, the reply was “Great story, but the US is where the money is.” Led by the Magnificent 7, the US markets were doing quite well, and this preference was evident in the US’s dominance in global indices and capital inflows over the last five years or so.
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However, this one-sided trade is slowly shifting. Growing interest in deploying capital outside the US is driven partly by questions about US growth sustainability. At its peak, the US made up almost 70% of the MSCI All Country World Index, showing how concentrated global allocations had become.
Now, with cracks in that narrative, we’re seeing money flow out, with India as one of the beneficiaries. In recent weeks, there has been a steady positive flow, and institutional investors are increasingly focusing on new geographies. While institutional capital moves gradually, there’s a clear sense that investors are reassessing their US-heavy allocations and diversifying into global equities. India, with its market depth and strong fundamentals, is naturally part of those conversations. However, these are still early days, and markets can shift quickly.
I’ve been a stock picker for over two decades, and I’ve never believed there’s a time when there’s nothing worth buying—whether in India or anywhere else.
Do you think that Indian equities are priced to perfection, especially the mid-cap and small-cap stocks?
I’ve been a stock picker for over two decades, and I’ve never believed there’s a time when there’s nothing worth buying—whether in India or anywhere else. If you ask me to deploy capital in a market, it’s highly unlikely I’ll come back empty-handed. There’s always something, somewhere, worth considering.
That said, I think about opportunities more in terms of probabilities and risk-reward trade-offs—less about absolutes. It has definitely become more challenging in recent years to find compelling ideas in India, particularly given how well stocks have done.
You’ll often hear people say large-caps are more attractive than mid- or small-caps right now. But our approach doesn’t begin with market cap classifications—it starts with our investment framework: quality, growth, and valuation. We don’t go hunting for small-caps or mid-caps specifically. We look for companies that meet our criteria—and they can fall anywhere on the size spectrum.
By mandate, we have size and liquidity restrictions. We typically focus on companies with a market cap of at least $1 billion, which puts us among the top 500 stocks in the country. Yes, stock picking has become harder. But that doesn’t mean opportunities have disappeared—it just means you have to work harder to find them.
Compared to a few years ago—particularly right after covid, when the broader market offered a lot more low-hanging fruit—today’s environment demands deeper research, sharper judgment, and a willingness to look beyond the obvious.
Which sectors do you like, and which ones are a screaming no?
Broadly, consumer staples seem to be a no-go right now. From a fundamentals standpoint, the growth doesn’t justify the high valuations—50 to 70 times earnings for mid-single-digit growth. While there may be one or two exceptions, the sector as a whole doesn’t excite me.
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On the other hand, financials—particularly some private sector banks—make more sense. They offer reasonablereturn on equity (ROEs), decent growth, and fair valuations. Right now, the IT sector is contrarian, as many are writing it off due to artificial intelligence (AI) narratives and fears of automation. But when sentiment swings too far, it’s worth a second look. A few Indian IT companies tick all the right boxes—strong return ratios, good dividends, and solid management. If growth prospects improve, this sector could become very attractive.
Take Infosys, for example—despite 0-3% topline guidance for next year, it’s still seen as aggressive, indicating how weak growth expectations are. However, this is a large sector with high-quality names, and if the growth outlook improves, the upside could be significant.
Do you think the production-linked incentive (PLI) manufacturing stories are truly reflecting in company fundamentals, or are they still largely narrative-driven price action?
If you look at manufacturing’s share of India’s GDP, it hasn’t really moved despite corporate tax cuts, PLI schemes, and the China+1 narrative. Services exports have surged, but manufactured exports remain flat—so not much has changed at the macro level yet.
That said, new tariff alignments and moves like Apple shifting iPhone production to India are encouraging. It’s a good start, and if we can grow in areas where we already have a base—like textiles—we could build meaningful scale.
Still, I’d avoid overpaying for narrative-driven stocks. I’m okay missing the first 20-25% of the rally—I’d rather wait for real evidence of change before getting in.
Looking at the market rally, do you think it’s backed by earnings, or are we leaning too much on liquidity and sentiment?
Consensus estimates for FY26 Nifty earnings are expected to grow by 12-13%. What has shifted recently is the flow of funds and the growing narrative of India being a haven, benefiting from global realignments. While this narrative is gaining momentum, growth is slowing. For example, GDP growth expectations have been reduced by almost 50 basis points, from a projected 6.5% three months ago.
Earnings growth, which saw a sharp 18-20% annual rise from 2021 to 2024, is now expected to slow to around 12-13%. The recent rally, over the past 4-5 weeks, seems driven by both recovery expectations and the perception of India as a relatively safe investment destination.
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Yet, India has had the highest allocation in our portfolio for nearly three years, reflecting our confidence in its position in emerging markets. Throughout this time, we’ve maintained a steady 20% allocation, signalling long-term conviction rather than chasing short-term trends. We didn’t increase exposure during the 2023-24 rally or reduce it in late 2024, instead staying disciplined and investing in high-quality, largely large-cap Indian stocks.
Cash levels in mutual funds have recently hit a multi-year high, reflecting the cautious optimism driving the current rally. With this in mind, how do you strike a balance between investing and maintaining capital discipline?
Personally, I’ve never consciously increased cash levels in the portfolio. The cash we have typically arises from assets we’ve sold but haven’t yet reinvested because we’re waiting for the right opportunities. I’ve never set a target to increase cash from 3% to 6% just because I feel bearish about the market.
We mostly work with sophisticated institutional investors who manage their own cash allocations; my role is to invest in emerging markets or India as per the mandate, not to hold cash.
That said, there are various schools of thought on managing cash levels. Some may increase cash up to 20% or 25%, and there’s a justification for that. But our approach has always been shaped by the needs of our clients. We don’t actively manage cash levels based on market sentiment. Instead, cash levels rise when we aren’t finding enough opportunities to invest, or when we see certain stocks becoming overvalued. It’s not about expecting a crisis to hit, but rather about waiting for the right opportunities. So for us, the high cash levels often indicate that there’s simply not enough to deploy, rather than being a sign of caution about the market.
Which sectors in India’s listed market do you believe are currently over-owned by institutional investors?
I would say the same sectors I mentioned earlier—some consumer names and industrials—are currently owned by institutions. The narrative around these sectors has always been optimistic, with expectations of strong earnings growth. However, I still believe that valuations in these sectors are disconnected from the growth reality.
As for financials, I’m seeing an increase in foreign ownership, which suggests it’s one of the few areas in India still attracting attention.
Which other countries do you think are competing with India for attracting foreign capital?
Emerging markets as a whole have been attracting some flows recently, with Europe also making a comeback. The German market recently hit an all-time high, and as I mentioned earlier, there is a noticeable shift of capital moving out of the US to other parts of the world, including China.
Over the past few years, there’s also been a rise in allocation to private markets, with private equity seeing substantial flows in recent years. It’s interesting to watch how these dynamics will evolve, especially as the majority of private holdings are still in the US, where growth appears to be slowing.
(Views are personal and not a recommendation)
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