Indian Equities Become 'Relative-Return Disaster' in 2025
Christopher Wood, Global Head of Equity Strategy at Jefferies, has delivered a stark assessment of India's stock market performance in 2025, labeling it a 'relative-return disaster' despite being saved from absolute losses by relentless domestic investment. In his influential weekly GREED & fear newsletter, Wood highlighted that Indian equities have underperformed the MSCI Emerging Markets Index by a dramatic 27 percentage points year-to-date.
Foreign Exodus Meets Domestic Resilience
The analysis reveals a troubling divergence in market dynamics. While foreign institutional investors have pulled out USD 16.2 billion from Indian equities this year—marking one of the strongest emerging market outflow episodes—domestic investors have stepped in as the market's savior. 'The Indian market today is being supported by domestic flows on a scale that is unprecedented in emerging markets,' Wood emphasized.
Indian mutual funds alone witnessed ₹321 billion of inflows in October, while total domestic inflows—combining retail and institutional money—have averaged USD 7.4 billion per month this year. This massive local participation has effectively absorbed the entire supply of new equity issuance, preventing more severe market corrections.
Macro Improvements Contrast With Political Risks
Despite the equity market struggles, Wood identifies encouraging signs in India's macroeconomic landscape. He suggests the rupee may have bottomed after becoming the worst-performing major emerging market currency year-to-date. Jefferies projects India's current account deficit will narrow to 0.5% of GDP in FY26, representing the lowest level in two decades, supported by robust foreign exchange reserves of USD 690 billion—equivalent to 11 months of imports.
However, Wood sounded alarms about rising political populism threatening fiscal stability. The Bihar election has amplified fiscal stress with competing promises including Rs 10,000 cash transfers per household woman and Rs 30,000 annually for five years plus electricity subsidies. 'This is not sustainable in a state with per capita income of ₹69,321,' Wood wrote, describing Bihar as 'a stress test' for India's fiscal credibility.
Sectoral Divergence: Real Estate Shines, IT Struggles
Jefferies identifies notable sectoral variations within the market. The real estate sector emerges as a bright spot with attractive valuations. Property analyst Abhinav Sinha noted that 'developer valuations are near one standard deviation below long-term averages' even as pre-sales accelerate. Developers have reached their strongest balance-sheet position in a decade, with net debt projected to fall from Rs 520 billion in FY19 to an estimated Rs 28 billion by March 2026.
Conversely, Wood identifies the IT services sector as India's AI vulnerability. Revenue growth for listed IT companies slowed to 1.6% year-on-year in Q2 FY26, triggering valuation de-rating. Meanwhile, India-based Global Capability Centres continue expanding their contribution to the services economy.
Cyclical Recovery Prospects and Portfolio Shifts
Jefferies maintains cautious optimism about India's cyclical outlook, noting that credit growth has rebounded from 9% in May to 11.5% by mid-October, aided by monetary easing and GST rate cuts effective September 22. Mahesh Nandurkar of Jefferies commented that 'the building blocks for a cyclical recovery are in place, but the follow-through is critical.'
The GREED & fear newsletter also implemented several portfolio adjustments, including exiting French company Saint-Gobain in favor of Japan's Nintendo across global portfolios, and replacing JSW Energy with Samsung Life Insurance in the Asia ex-Japan portfolio. In China holdings, the note added a new position in AI chipmaker Cambricon Technologies with 4% weighting.
