Daily Voice: Market has priced in much of the pain; downside limited, earnings key to FII return, says Wright Research founder

“The key thing to remember is that FIIs have returned to India in the past only when our earnings growth outpaced that of other emerging markets. Actual earnings delivery over the next two quarters will make the difference,” she said. Do you see a strong possibility of a reversal in the global AI trade sooner rather than later? I don’t see a full reversal coming just yet, but the global AI trade is definitely in a more fragile spot now.

It’s quite something: the top 20 AI and semiconductor stocks lost over a trillion dollars in just one week, and interestingly, it was financing worries that set it off, not a drop in demand. Hyperscalers are still guiding for higher capex, but with the cost of capital also moving up, the maths on every new data centre is getting tighter. What I expect now is more sharp ups and downs within the theme, maybe 10 to 15 percent swings, but not a total collapse.

The chip supply chain is still showing real revenue growth, so to me, this looks more like the market adjusting valuations than the end of the cycle. Will the US Federal Reserve’s October meeting signal a possible rate hike in December, or is a hike more likely next year? I’d be very surprised if the Fed does anything in October; it’s almost certain to be a hold, especially with the midterms just around the corner.

Honestly, the signal is what matters here, not the actual move. With US inflation still at 3.7 percent and oil trading above US$ 110 a barrel, the market is already pricing in about a 75 percent chance of a 25 basis point hike in December. Every economist in the Reuters poll seems to agree. So for me, December is the date to watch. The bigger risk, looking ahead, is that if energy-driven inflation starts feeding into wages, we could see even more tightening in 2027, not less.

Is FII selling nearing exhaustion? You can see the selling pressure has really cooled off now. FIIs dumped over Rs 45,000 crore in just the first six days of October, but if you look at the last week, daily flows have been quite small — even positive on some days. With more than Rs 3 lakh crore outflows so far this year, it’s already the heaviest selling year on record, which tells you positions are pretty light.

So yes, exhaustion in terms of flows looks very close. But for a proper comeback, we’ll need the rupee to settle near 95 and the oil shock to ease up a bit. Will markets struggle to find direction as long as elevated oil prices and interest rates persist, even if most selling is behind us? Yes, I think we’re in for a range-bound market as long as oil and rates keep climbing. The RBI has shifted to calibrated tightening with the repo rate at 5.50 percent, the Federal Reserve is still hiking, and Brent above US$ 110 a barrel is hitting India’s current account and squeezing corporate margins.

Even though most of the selling is probably behind us, the discount rate on equities is still moving up. The Nifty at around 22,750, after a 14 percent drop this year, has already priced in a lot of the pain, so I don’t see much more downside. But for a real uptrend to start, we need oil prices to cool off first. Do corporate earnings need to deliver meaningful growth for FIIs to return to Indian equities despite these headwinds?

Earnings really have to deliver now. Consensus is looking for about 27 percent profit growth for the Nifty 50 in Q2 FY27, which would be the strongest in 17 quarters, and early numbers from banks and IT are quite encouraging. The key thing to remember is that FIIs have come back to India in the past only when our earnings growth beat the rest of emerging markets. Valuations by themselves won’t do the trick, especially with a strong dollar and rising US rates.

So it’s actual delivery over the next two quarters that will make the difference. Are large insurance companies likely to gain market share following the IRDAI paper? The consultation paper puts a cap on management expenses — 12.5 percent for life insurers and 20 percent for general insurers over five years. This tighter distribution math really favours the big players, especially those with captive bancassurance and strong direct or digital channels.

Larger insurers with lower acquisition costs and established agency networks are much better placed to handle this and pick up market share. At the same time, the paper lowers entry barriers, so over the long run, efficiency will matter just as much as size. The final rules will decide how fast this plays out, but the direction is clearly towards consolidation. Are you positioning your portfolio to benefit from companies gaining market share?

Right now, we’re running the portfolio in a defensive mode, so our scoring is leaning heavily on earnings momentum as the main driver. Companies that are gaining share tend to show up in those signals first, which is how any benefit from the IRDAI proposals would actually make its way into the portfolio, if it shows up in the numbers. Value, quality and growth are all pretty neutral for us at the moment.

We’ve got a meaningful small-cap tilt and a cash allocation, which is just our way of staying disciplined and cutting risk when sentiment is weak. We’re looking to add exposure as soon as the signals start to improve.