Kotak sees chinks in ‘Indian market is decoupled’ theory amid subpar economic recovery

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26 Aug, 2025 12:21

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Indian stocks have outperformed overseas markets for a couple of months, largely because of a perception among investors that Asia’s third-largest economy is in a relatively better position compared to others.

The belief, amid talk of a recession in the US and Europe, supports the theory that the Indian economy is decoupled or detached from world markets, and so the rally may continue.

Kotak Institutional Equities believes this theory is far from the truth; investors tend to like what they see or only see what they like.

“We hope that the Indian economy and market can live up to the high expectations implied in expensive valuations of the market. Economic recovery has been somewhat subpar so far and twin deficits are well above comfort levels even without factoring in any potential energy price shock,” a team of analysts at Kotak led by Sanjeev Prasad wrote in a note on September 6.

Thanks to the recent rally, in the year so far, the NSE Nifty is flat. In comparison, the S&P 500 has fallen 19 percent Nikkei 6 percent, FTSE 4 percent, DAX 20 percent, Hang Seng 19 percent and CAC 16 percent.

This gives the impression that the Indian market may have decoupled from global markets. Prasad argues that decoupling is not possible in reality.

“We note that markets may decouple in the short term (for whatever reasons) but economic linkages will inevitably result in some ‘relationship’ between markets too. The Indian economy is too interlinked with the global economy for economic or market decoupling in reality,” he wrote.

Energy price challenge

Some of his views conform with those of his peers at Jefferies and BoFA Securities who believe the market is overvalued. They have also turned cautious.

Prasad believes a global slowdown will have severe repercussions for India’s balance of payments, which is already challenged by lower exports and lower capital inflows.

At the same time, imports may stay high, especially if energy prices were to stay high.

World markets have tumbled amid surging energy prices, especially in Europe. The crisis has been triggered by the war in Europe and following actions of Russia and western powers. The markets have also reflected the fallout of such a crisis.

“We are not sure if the Indian market is factoring in risks from short-term factors such as higher-for-longer inflation unlike other markets. Indian market valuations are quite expensive,” Prasad wrote.

Medium-term risks

“Earnings yield is low relative to bond yield when compared with periods with similar levels of bond yields. Lastly, increasing medium-term risks linked to climate change and geopolitics warrant higher cost for equities.”

Kotak Institutional Equities has also made some portfolio changes. It added Sun Pharma to a recommended large-cap portfolio with a weight of 150 basis points (bp)s, saying it offered a potential 17 percent upside.

Kotak is adopting a more defensive stance on its portfolio and reducing risks wherever possible. In this context, it has removed Motherson Sumi Systems (130 bps) from the portfolio given its high exposure to Europe. It also adjusted 20 bps from ICICI Prudential Life (to 250 bps).

Kotak removed Ashok Leyland and Oberoi Realty from its recommended mid-cap portfolio, as both stocks have moved above the 12-month fair values after their strong performance over the past few weeks. Ashok Leyland is up 14 percent and Oberoi Realty is up 14 percent over the past three months.

Disclaimer: The views and investment tips offered by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.