Peak pessimism behind Indian markets? Fund managers see earnings, FII flows improving

Indian equity markets may have moved past peak pessimism, with a recovery in corporate earnings, easing crude oil prices and a shift in foreign investor flows improving the outlook for stocks, according to three fund managers who spoke to CNBC-TV18. They believe the recent improvement in sentiment could support a broader market recovery after nearly two years of consolidation.

Harsha Upadhyaya, CIO of Kotak Mahindra AMC, said several factors that had weighed on market sentiment, including elevated crude oil prices, currency volatility and sustained foreign institutional investor (FII) selling, were now beginning to turn positive.

"It looks like peak pessimism is behind us," Upadhyaya said. Crude oil prices have fallen by nearly $20-25 per barrel over a couple of trading sessions. If the decline is sustained, it could ease concerns around global macroeconomic conditions, currency movements and foreign flows.

A recovery in corporate earnings is also strengthening the case for Indian equities. Upadhyaya pointed out that Nifty earnings growth was less than 3% in FY25 and below 6% in FY26. However, growth rose to 17.6% year-on-year in the previous quarter and was running at around 23% in the ongoing results season.

Pankaj Tibrewal, Founder and CIO of IKIGAI Asset Manager, said the earnings recovery was visible across market capitalisations. Of the top 500 companies, 370 had reported their second-quarter results at the time of the interview. These companies had recorded 23% top-line growth and 29% bottom-line growth, while 26% had reported year-on-year profit growth of 50%.

Tibrewal said the disconnect between strong corporate fundamentals and market performance had largely been due to weak sentiment and foreign investor outflows. However, FIIs had bought equities worth ₹20,000 crore over the previous four trading sessions, suggesting a change in the flow dynamics.

He believes further outperformance by Indian equities relative to other emerging markets could encourage foreign investors to reduce their underweight positions. Citing last month's performance, Tibrewal said Indonesia and Brazil had fallen 16% each, while South Korea and Taiwan had declined 10% each. India, in contrast, had gained 4% in dollar terms.

"If this continues for two or three more months, trust me, FIIs will come in to cover their underweight positions, and that itself will make sure that markets move to a new high," he said.

Tibrewal added that short covering had already begun, although he believes the real buying by foreign investors is yet to start.

Vikas Khemani, Founder and Chairman of Carnelian Asset Management, said the recent rally should be viewed in the context of nearly two years of market consolidation. A short-term move of 2% does not change his longer-term assessment, as he believes investors should focus on a five-to-10-year horizon rather than react to near-term market movements.

Khemani compared the current market environment with 2022, when uncertainty surrounding the Ukraine war had weighed on sentiment. He recalled advising investors to build positions during that period, pointing out that the subsequent two years delivered strong returns for that investment vintage.

He said India's economic fundamentals remained supportive, citing credit growth, GST collections, insurance premium collections and automobile sales. He also highlighted the strength of corporate balance sheets and said India was among the few economies capable of sustaining growth of 6-7%.

"People who understand the market and have been in it for a long time are fairly calm about it and use that as an opportunity rather than a risk," Khemani said.