India's equities outlook remains constructive as reflation, earnings recovery and capex cycle support markets; RBI rate hike risk looms: LLama Research
New Delhi, July 18
India is likely to remain a key outperformer in the second half of FY27 as robust growth, sustained capital expenditure, credit expansion and a structural build-out in power and infrastructure support earnings, even as a renewed inflationary cycle could lead to higher interest rates later in the fiscal. The base case remains one of reflation and inflation, with equities expected to benefit from earnings and flows before a potential 25-50 basis point rate hike by the Reserve Bank of India in H2FY27, according to a report by LLama Research.
The report has raised the probability of an inflation-up scenario to 52 per cent from 40 per cent earlier, while reducing the probability of a disinflation-led Goldilocks scenario to 30 per cent from 43 per cent. It said India has absorbed a doubling of oil prices while maintaining 7.8 per cent growth, indicating reflation rather than stagflation. "The constructive stance holds," the report said.
India's economic performance remains stronger than that of most major economies, with the country recording 7.8 per cent GDP growth and a manufacturing PMI of 59.3. However, inflationary pressures remain a concern, with WPI inflation at 9.4 per cent. The report expects the war premium in commodities to ease in the near term, opening a window for equities, before structural forces linked to AI, power demand and rearmament potentially push inflation higher again.
"Equities ran 9 to 15 months into rising inflation," the report said, adding that the current window is supported by a projected 15 per cent earnings recovery over FY26-28, record domestic institutional buying and relatively low foreign investor positioning.
The report remains particularly positive on India, noting that the Nifty is trading at 17.7 times forward earnings against its 10-year average of 18.6 times, despite expectations of a 15 per cent earnings recovery. It said India is "cheap in an expensive world", with foreign investors having sold USD 29 billion year-to-date while domestic institutions bought USD 45.5 billion.
Sectorally, the report favours energy, metals, infrastructure, power, defence, pharmaceuticals, automobiles, real estate and NBFCs/capital markets. It expects the structural power build-out to benefit upstream suppliers of metals, copper, transmission equipment, EPC services and fuel, rather than only utilities.
However, risks remain from a sharp oil shock, a faster-than-expected RBI tightening cycle and early disinflation. The report said the key strategy is to remain overweight in real assets and cyclicals in the base case, while rotating towards quality growth and rate-sensitive sectors if disinflation arrives earlier than expected.
— ANI
Reader Comments
As someone who's been investing in mutual funds for years, this report makes me cautiously optimistic. 15% earnings recovery and still below 10-year average PE ratio? That sounds promising. But I'm worried about the common man - rising WPI at 9.4% means higher grocery bills for everyone. 📈
All this talk of earnings and flows sounds nice, but when will the common man see the benefits? My salary hasn't increased 15% in 3 years, let alone 2. And with interest rates likely going up, my home loan EMI will become even more painful. The stock market is not the real economy. 🤔
Interesting analysis from Llama Research. The fact that India has absorbed doubling oil prices and still maintained 7.8% growth is remarkable. I'm particularly bullish on power and infrastructure sectors - the capex cycle seems real this time. But investors should definitely keep an eye on those RBI rate decisions.
This makes me feel better about my SIPs honestly! With DIIs buying ₹45,500 crore and FIIs selling $29 billion, it shows domestic investors have faith in India's story. But I wish they'd talk about how to protect small investors who might panic if rates rise. Education is key! 📚
The 'cheap in an expensive world' argument is compelling. Nifty at 17.7x forward earnings vs 18.6x historical average, plus earnings recovery - looks undervalued to me. But the 52% probability of inflation-up scenario is concerning. Time to overweight real assets as they suggest, but also keep some cash for
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