Daily Voice: Is the recent recovery in Indian equities enough to signal a sustained risk-on trend? Narnolia CIO explains

Kumar believes a sustained revival in foreign institutional investor (FII) flows into India will depend on domestic companies regaining their relative earnings-growth advantage. As corporate earnings growth improves relative to other global markets, India is likely to reclaim a larger share of global investor allocations, he said. Do you expect the risk-on trade to continue, given the significant recovery in equity markets since last week?

The recent pullback in Indian equities is still some distance away from establishing a sustained risk-on trend. Indian markets have significantly underperformed most major global indices over the past two years. While valuations had moved towards the upper end of their historical range in 2024, they have since corrected meaningfully and are now closer to the lower end of that range. This moderation in valuation multiples is likely to rekindle long-term investor interest and create opportunities for intermittent rallies, such as the one we are witnessing currently.

However, a sustained risk-on phase will require stronger confirmation from earnings growth and market momentum. Is the sharp correction in US AI stocks merely a phase of normal profit booking, or does it reflect deeper concerns about the sustainability of the AI-driven rally? The recent correction in AI-related stocks has been driven by multiple factors. Several large, cash-generative technology conglomerates that are investing heavily in AI infrastructure are now entering a phase of negative free cash flow, raising questions about the pace and sustainability of the current investment cycle.

At the same time, acute shortages of memory chips and other critical components required for AI data centers are constraining the speed of capacity expansion. After three consecutive years of nearly 80 percent year-on-year growth in AI-related spending, the pace of investment is expected to moderate in 2027. However, even at a slower rate of growth, the absolute scale of AI-related spending will remain substantial.

We believe this moderation is more likely to represent a healthy phase of adjustment in the investment cycle than a structural reversal, and could lay the foundation for a fresh rally once the current valuation correction runs its course. Could further weakness in global AI momentum trigger a reversal in FII flows towards Indian equities? FII flows are fundamentally driven by relative corporate earnings growth across markets.

While India has remained the fastest-growing major economy, the earnings growth of Indian companies has been relatively modest compared with markets such as South Korea and Taiwan, where several companies have delivered 50–60 percent annual earnings growth over the past 2–3 years, driven by the AI-led capex cycle. We believe a sustained revival in FII flows into India will depend on Indian companies regaining their relative earnings-growth advantage.

As Indian corporate earnings regain their relative growth advantage, India is likely to reclaim its rightful share of global investor allocations. Do you expect the recovery in corporate earnings momentum to continue despite elevated crude oil prices? Q2FY27 earnings are shaping up strongly, sustaining the momentum witnessed in Q1FY27 despite elevated crude oil prices. The current earnings growth trajectory is the strongest seen in the last 10–12 quarters and appears to have a structural underpinning rather than being merely cyclical.

A particularly encouraging development this quarter is the strong revival in large-cap earnings growth. Do you expect crude oil prices to remain elevated due to persistent supply-side disruptions, even if Trump loses the US midterm elections? Despite improved crude oil flows from the Gulf, prices remain elevated. The key reason is the sharp escalation in shipping costs and insurance premiums, coupled with longer transit routes.

Consequently, markets are increasingly focused not just on crude availability but on its actual delivered cost. The outcome of the US midterm elections could have further implications for this rapidly evolving geopolitical situation. Governments, corporates and investors must remain agile in responding to these evolving geopolitical dynamics. Do you see an incremental buying opportunity in healthcare stocks following their significant correction?

Which stocks or segments look attractive at current levels? Hospital stocks have corrected sharply during 2026, with several names declining by 25–30 percent. Following this valuation reset, the sector offers attractive long-term investment opportunities. Within pharmaceuticals, we favour companies with expanding CDMO pipelines, while large-cap players with strong innovation pipelines, particularly in biologics, also look attractive from a valuation perspective.

What are your top sector picks for Diwali 2027? We maintain a positive outlook on auto components, precision engineering, healthcare delivery, insurance, and select new-age businesses, given their attractive long-term growth potential.