Expert view: Developed markets now offer higher growth and higher ROE, says Waterfield Advisors MD

Expert view: Riddhiman Jain, Managing Director (MD) and Head - Investment Strategy and Solutions at Waterfield Advisors, believes developed markets now offer higher growth and higher ROE. In an interview with Mint, Jain said Q1 showed little to no impact of oil prices, so Q2 and Q3 become the key watch for inflation. Edited excerpts:The overall return of the market is significantly negative this year.

Is 2026 going to be a washout year?At the index level, it has been a tough year, and a tough two years. The Nifty is down about 13% YTD. US tariffs, the West Asia war, crude oil prices, the anti-AI trade and rupee volatility all hit at once. Beneath the headline, stock-specific opportunities in defence, power and autos were immense.Asset allocation made the difference: REITs, InvITs, performing credit, private equity and gold anchored absolute returns.

With just two months of the year left and the US midterms ahead, volatility will stay, so returns are unlikely to be linear.Do you see any structural weakness that has emerged as a major worry for foreign investors? Is it a lack of innovation or new technology that is keeping investors cautious about the Indian economy?The issue is relative growth more than a lack of innovation. Over the last two years, nominal GDP growth in the developed world has risen while India's has stayed flat or slipped.Three forces drove that: (i) AI-led spending in the US, (ii) corporate rejuvenation in Japan, and (iii) fiscal expansion in Germany.

Developed markets now offer higher growth and higher ROE, even if it is concentrated in fewer names.Foreign capital has followed that differential, with FPIs pulling a record nearly ₹3.1 lakh crore from Indian equities this year.Q1 earnings were healthy, and Q2 has also started on a positive note. Are we yet to see the second- and third-order impact of oil prices?Largely, yes. Q1 showed little to no oil impact, so Q2 and Q3 become the key watch for inflation.

Margins are the variable to track, and the question is whether companies can pass higher costs on to consumers.That makes this a sector-specific story rather than a benchmark one. The base effect also comes into play from Q3, which could temper earnings growth.How do you see this market for the next 1-2 years? What are the sectors and themes investors should focus on?We see non-linear returns, with no single theme dominating.

It is a stock-picker's market that rewards staying nimble and open to sector rotation. Domestic themes look the strongest: (i) domestic consumption, supported by last year's tax cuts and GST rationalisation lifting purchasing power, and (ii) capex-intensive areas such as hospitals, manufacturing and the power value chain.What should be our short- and medium-term strategy for the IT sector?The IT sector has bounced sharply.

Nifty IT just logged its best week since 2008 as the anti-AI trade unwound and Q2 margins came in better than feared.A weaker rupee did much of the heavy lifting, though, and volume growth has yet to recover. If the currency strengthens, that tailwind fades.For the medium term, the sector remains structurally challenged, though some of that is already in prices.Global AI money is flowing to semiconductors, frontier models and the ecosystem around them, not to services.IT services should have their day once AI adoption becomes widespread and enterprises need partners to build it out.

Encouragingly, AI revenue is now being disclosed and is growing across the large players.Do you think a removal of LTCG can act as a major factor that can bring FPIs to India? Can they overlook the rupee's weakness, rising global bond yields, elevated oil prices, and the lack of AI trade?With limited monetary room, an LTCG cut works as a form of fiscal stimulus. Last year's tax cuts and GST changes put more money in consumers' hands and anchored spending.An LTCG cut would help foreign investors more directly.

It would also be strongly positive for sentiment, helping to arrest FII outflows and support the rupee.It does not structurally fix the currency, rising global yields, oil or India's absence from the AI trade. It does buy time, and markets react to the direction of change, which here is clearly positive.Read all market-related news hereRead more stories by Nishant KumarDisclaimer: This article is for educational purposes only and does not constitute investment advice.

The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.