Whalesbook
Goldman Sachs analysts warn that Indian stocks now offer a less attractive risk-reward profile compared to their North Asian counterparts. This is mainly because valuations are high relative to expected growth, and investors are concerned about the impact of artificial intelligence (AI).
Investor Strategy Recommendation
For investors who can handle short-term market swings, Goldman Sachs suggests focusing on companies with low foreign ownership. The firm believes these stocks could perform well when global investor sentiment towards emerging markets, including India, improves.
Specific Stock Picks
Goldman Sachs reiterated a positive view on 12 specific companies: Hindustan Unilever, Larsen & Toubro, Bajaj Auto, Bank of Baroda, Trent, Solar Industries India, Siemens, Bajaj Holdings & Investment, Bosch, One 97 Communications, and MRF. The firm highlighted their low earnings sensitivity to oil price shocks as a key advantage.
Foreign Investor Flows
Foreign institutional investor (FII) outflows have been significant recently and may be close to peaking. However, Goldman Sachs does not expect capital to return quickly to India. Data shows FII flows don't immediately follow falling oil prices; for example, capital didn't return after an April oil price drop, even after heavy selling. Historically, falling oil prices have shown only a modest positive short-term link to foreign flows.
Earnings Concerns for Foreign Investors
Changes in earnings forecasts are a key factor affecting foreign investment in Indian stocks. Goldman Sachs believes that while much selling might have happened in anticipation of downgrades, investors will likely hold back from returning until there's more clarity on earnings recovery.
Foreign investors have sold $22 billion in Indian equities year-to-date, surpassing the 2025 annual record of $19 billion and marking the biggest sell-off in over 2.5 decades. On a rolling 250-day basis, current selling of $30 billion is close to 2022 and 2025 lows. Since its peak in September 2024, foreign investors have offloaded a record $53 billion, representing 0.9% of market capitalization. This outflow exceeds the selling during the 2009 Global Financial Crisis but remains below the 1% seen during the 2022 global tightening cycle. If outflows hit 1% of market cap, it would mean an additional $4 billion in selling.
Shifting Foreign Ownership
Foreign ownership in Indian equities fell to a 14-year low in the first quarter of 2026. FII holdings also dropped below domestic institutional investor (DII) holdings for the first time in over two decades. FIIs now hold about 16% of Indian equities, while DIIs hold nearly 17%, according to Q1-CY26 filings. Foreign share decreased most in large-cap stocks, hitting a 10-year low. Sectors like banks, real estate, and consumer retail & services saw the biggest quarterly drops in foreign ownership. Metals, utilities, and industrials, however, saw an increase in foreign holdings.