Take a little bit more risk, trim exposure to IT, pharma, says Devarsh Vakil, HDFC Securities

While FIIs have exited due to weak earnings and currency concerns, Vakil expects India’s growth story to eventually draw them back.

While most market participants are decrying their portfolio's deep losses amid the ongoing market downturn, HDFC Securities' Head of Prime Research Devarsh Vakil believes it is time to stop hiding in defensive sectors such as IT and pharma. Instead, he suggests slowly taking a more risk-on approach, as the correction approaches its bottom.

In a conversation with Moneycontrol, Vakil noted that the ongoing downturn will soon find a sustainable bottom, following which, a sectoral rotation is likely to be seen. Over the next six to 12 weeks, HDFC Securities will ask investors to move towards sectors or ‘risky investments’ such as cement, certain chemical stocks, along with commodity-focused segments.

Earlier, to protect their investors’ portfolios amid the sour market sentiment, the research firm asked them to increase their allocation towards defensive sectors such as IT and pharma. However, now, along with the cement and chemicals bet, Vakil believes the equity portion of an investor’s portfolio should have a 30-40 percent allocation towards BFSI (banking, financial services, and insurance) companies, as those remain some of the pockets of fair valuation seen in the markets.

Further, Vakil believes that given no further geopolitical uncertainties, the broader markets are also likely to make a sustainable bottom within the next few weeks. Once the bottom has been achieved, the previous uptrend is likely to come out aggressively.

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Trump uncertainties weigh

India was poised to be a big manufacturing hub, with the government spurring indigenous production with schemes such as PLIs. Further, a lot of domestically manufactured products were likely to be exported across the globe. Vakil shared an interesting tidbit: when other Southeast Asian countries were at a similar GDP per capita level, around the $2500 mark like India, exports were the key driver of the next leg of growth.

However, with US President Donald Trump-led tariffs, the export-oriented sectors might see significant issues. “This uncertainty is a big hurdle towards making India a global manufacturing hub,” said Vakil.

The challenge is that any of Trump’s statements have a significant impact on global sentiment and trade. But since his presidency will last four years, we can't just wait it out, we must adapt to the situations. With Trump's second term, businesses must plan for the next four years, uncertain about what comes after.

For example, a US or European multinational with exposure in China may consider setting up a plant in India to mitigate risks. “But since building the plant and starting exports takes 2-3 years, a sudden policy shift from Trump, like a 10 percent tariff, could disrupt their business model entirely. These uncertainties make planning ahead difficult,” he added.

Have FIIs left India for the foreseeable future?

Foreign institutional investors came to India for growth, not value, according to Vakil. However, over the past few quarters, corporate earnings failed to give FIIs the kind of growth they wanted. On the other hand, China’s various stimulus packages combined with the DeepSeek-led AI innovations and cheap valuations made China a very attractive bet.

Currency depreciation woes are continuing to keep FPIs away. With the increasing tariffs threats, and reduced RBI intervention in stablising the currency, until the rupee attains a stable level, foreign capital might stay away from India.

However, on a more optimistic note, for FY26, HDFC Securities’ estimate is that India Inc will have about 15-16 percent earnings growth. “Growth is going to come back,” Vakil stated emphatically.

He added the a very small portion of the total wealth of FIIs was earlier allocated towards Indian equities. However, as the Indian growth story chugs along, foreign capital will have no other choice but to come back to India to capitalise on the growth.

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