FIIs still underweight India, waiting for correction; Iran conflict adds fresh caution: Kotak's Pratik Gupta

FIIs still underweight India, waiting for correction; Iran conflict adds fresh caution: Kotak's Pratik Gupta

• Foreign investors underweight India, waiting for market correction
• AI disruption concerns weigh on Indian IT sector sentiment
• Domestic funds show caution on small- and mid-cap stocks

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Foreign investors are still largely underweight India and are waiting for a deeper market correction or fresh inflows into emerging market funds before increasing allocations, said Pratik Gupta, CEO and Co-Head of Kotak Institutional Equities -- in his key takeaways from Kotak Institutional Equities’ annual investor conference.

“The strong foreign investor attendance at our conference was not because they’re looking to buy Indian stocks right away,” said Gupta.

The four-day conference in Mumbai saw participation from about 984 investors across 240 institutions and 246 companies, reflecting strong global interest in India. But many foreign investors attended primarily to update themselves on the market rather than deploy capital immediately.

Many global funds said they had been underweight India for some time and were waiting for a meaningful correction or fresh inflows into emerging market funds before increasing allocations. Some investors added that India may not be their first priority among emerging markets right now given slowing growth and relatively expensive valuations.

However, the mood has turned more cautious after the outbreak of the Iran conflict over the weekend, which could pose risks for oil-import dependent economies such as India.

“With the outbreak of the Iran conflict… the foreign investor mood has turned cautious again as India is vulnerable to disruptions in oil and gas supplies,” Gupta said.

AI worries weigh on IT sentiment

A major topic of discussion among global investors at the conference was the potential disruption from artificial intelligence to the Indian IT services industry.

Many US investors questioned companies about whether AI could lead to significant white-collar job losses and lower demand for traditional outsourcing services. According to Gupta, investors came away with mixed views and many remained unconvinced that AI would have only a mild impact.

The concerns are already reflected in market performance. The Nifty IT index has fallen about 17% in the past month, compared with a roughly 5% decline in the broader Nifty, suggesting investors are rotating away from the sector.

Some investors are instead looking at beneficiaries of rising data centre demand in India, including companies linked to power utilities, transmission equipment, power cables and backup power systems.

Domestic funds turn cautious on smallcaps

The conference also revealed rising caution among domestic investors, particularly those managing small- and mid-cap funds.

According to Gupta, portfolio managers — especially in PMS strategies — are increasingly worried about illiquid small- and mid-cap positions that performed strongly in recent years but could become vulnerable if redemptions accelerate.

“Small/mid-cap funds… remain very worried about illiquid small/mid-cap stocks in their portfolios,” Gupta said.

Despite corrections in broader indices this year, Kotak believes valuations in many small- and mid-cap stocks remain stretched.

Limited upside for Nifty in near term

Kotak Institutional Equities expects only modest gains in Indian equities in the near term, citing elevated valuations.

The brokerage estimates the Nifty is trading at around 20 times March 2027 earnings, still at a significant premium to the MSCI emerging markets index. While steady domestic inflows and India’s structural growth story could support valuations, meaningful upside may be limited in the short term.

Key downside risks include a prolonged Middle East conflict leading to higher oil prices, a sharper global slowdown, a weak monsoon, or a slowdown in domestic retail inflows into equities.

On sectoral preferences, Kotak continues to favour large private banks and NBFCs, life insurers, telecom, domestic-focused pharma and healthcare, non-ferrous metals, residential real estate and airlines/hospitality, while remaining cautious on several consumer stocks as well as oil and gas and chemicals.