The wait is over for largecap bulls. Amish Shah, Head of India Research at BofA Global Research, confirmed the bank has flipped its stance on the Nifty from bearish to positive, ending a cautious period that began in August 2024. But the relief is selective. Shah was blunt: "We have now turned positive on Nifty. But that's where it stops." The brokerage sees pockets of opportunity in the benchmark index but warns that the broader market, specifically small and midcaps, is still bleeding value.
The math on smallcaps is getting ugly. Shah pointed to a stark mismatch: these stocks trade at a 42% valuation premium, yet their earnings growth advantage over the Nifty has halved. Between FY21 and FY24, small and midcaps delivered 15 percentage points more earnings growth than the index, justifying the premium. Consensus estimates for FY26-FY28 suggest that gap is shrinking to just 8.5 percentage points. "The valuation premium is 42%... whereas the earnings growth premium has halved," Shah said. "That makes us believe that there is a decent amount of correction left in the midcaps and smallcaps."
Domestic flows are the culprit. Shah noted that relentless mutual fund inflows have pushed prices up across the board, making it increasingly hard to find attractively valued names in the smaller segments. Overseas investors, meanwhile, are sitting on the sidelines. Higher crude prices and elevated US Treasury yields have made developed-market bonds look like a better bet than Indian equities. "Foreign investors are not in a hurry to look into India in a big way," Shah admitted. Still, he expects the pace of FII outflows to moderate, if not reverse, in the near term.
IT stocks are getting a reality check too. Despite the recent rally, Shah remains cautious, arguing that meaningful AI-driven revenue growth is years away. He expects largecap IT companies to deliver only mid-single-digit earnings growth over the next 12 months, predicting the sector will likely move sideways. "We do think that, for the next 12 months, difficult to make money in that space," he said. Stronger AI-led earnings may not emerge until FY28 or FY29.
There are bright spots, but they’re niche. Shah reiterated BofA’s positive view on shipbuilding, driven by government capital expenditure subsidies, production-linked incentives, and new orders. Precision manufacturing is another emerging theme, with auto component makers expanding into aerospace, defence, and semiconductor supply chains. But even here, Shah cautioned that valuations remain demanding, limiting the investment appeal for most players right now.