Monthly Market Outlook October 2026 By Prateek Agrawal

Dear Investor

This time let us share our thoughts on FPI selling and the fact that broader market is delivering higher earnings growth than large cap indices and the possible implications thereof for market performance.

FPIs are selling Emerging Markets. It might be a while before they become buyers

There are several reasons for this and some of them are as follows:

• The world is seeing interest rates increase. Last period saw both Japan and the US increase interest rates. Bond yields are ticking higher. Higher cost of capital reduces outward bound flows
• In India, currency has been weak. This could affect the returns for FPI investors. We believe that stable currency is required for FPIs to restart looking at India. The recent large deposit raise increases confidence.
• We believe that FPIs came to India for growth primarily and hence in our earlier growth spaces like IT services and Private sector banks, FPI stakes are high. These spaces no longer are delivering higher growth and maybe, hence, could be experiencing selling. Our new growth leaders are smaller and unable to absorb flows taken out of earlier growth leaders. To compound the problem, many regions of the world offer AI plays which is the hottest new growth space, while India has very limited offerings in the space.
• Also, there are quite a few large IPOs lined up in the US which can compete for capital.
• Higher oil prices may also negatively impact Indian economy.

There are some positives

• Valuations have improved vs other Emerging Markets
• Large US deposit raise by Banks have contributed to the recent increase in forex reserves to all time high
• AI trade may be getting pricey and less certain

As some of the adverse factors reverse, Indian markets could again get into favour.

It is time to distinguish between consistency and alpha. Broader market is delivering better earnings growth and there are many new spaces emerging

We have been saying for a long time that this is time for alpha. What we were missing out was to distinguish between consistency and alpha.

Earlier, in the 2008-2020 period, when NIFTY led earnings growth, fund constructs which were close to Nifty provided both consistency and better relative performance because Nifty itself was good performer. Now when the broader market is doing better growth, consistency with Nifty and better relative performance may not necessarily be seen together

Times have changed. Over the last few years, growth outside of indices has been higher than that of indices. Many factors contributed to the same. China+1 thought after COVID allowed governments to provide protection to domestic manufacturing. There was a thrust to Make in India. Many new spaces emerged. Spaces like digital, EVs, renewables, capital market participants, etc were largely absent from the market earlier. Most companies in these spaces were not born 10 years back. Now that growth is higher outside of large cap Indices, fund constructs away from index, in true sense, could have a much better chance of better outcomes over a period of time. Since the constructs are away from index, these funds may have different levels of consistency relative to the index.

This highlights the distinction between consistency and alpha.

We believe that since broad market continues to deliver higher growth and new high growth spaces continue to emerge, it continues to be time for Alpha. Flows seem to be following earnings too and provide further tailwinds

Risks at this juncture

Oil has again surged. High oil prices are more sustainable this time around given that the country just raised a lot of foreign deposits and forex reserves are at all-time high.

US sanctions against countries importing Russian crude, could be a new threat on the horizon. It is clear that major sectors in Indian economy such as software and pharmaceuticals and many chemicals may be relatively less impacted by higher duties. Textiles and shrimps may get impacted like last time. AI infra providers may see relatively limited direct impact given the importance US is putting on this space. Solar modules have already come under duty but it is on source of cells and may impact less. Hence, except specific areas in the economy, the overall impact may remain limited, although there could be some volatility. While threats have emerged, we think markets could sustain.

Overall outlook

We think there is a lot in the price. Uncertainties would remain but investors may learn to live with them. Domestic focused businesses and businesses with US manufacturing base may be relatively less impacted by these developments. Software and realty may stabilize as AI related jobs emerge on AI companies seeking to get RoIs on their investments. Newer spaces continue to emerge and may present alpha opportunities Thank You

Happy investing

May the Good Times Continue 😊

Source: MCX India, Bloomberg, MOFSL, RBI, NSE Indices. Data as on September’26

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