Bernstein recommends gradually increasing India equity exposure as the opportunity set is broadening

Overview

This is a Bernstein Asia quantitative strategy report focused on India quant strategy. The report notes that the Indian market has been under pressure since 4Q25, with MSCI India down about 10% in USD terms in 1H26, significantly lagging Korea and Taiwan. However, as regional AI/technology momentum trades come under pressure, India’s relative appeal as an anti-momentum, anti-AI trade is rising. The report believes India is still not in a full recovery, but valuations, earnings, fund flows, and factor signals together show that the opportunity set in the Indian market is expanding.

Core views

The core views include: first, India’s valuations have retraced to more attractive levels, with MSCI India forward P/E at 18.6x, below the 10-year average, and Financials and Technology near COVID-era depressed valuations; second, the earnings downgrade cycle has not fully bottomed, but large-caps and sectors such as Materials and Consumer are showing early signs of earnings recovery; third, long-term earnings growth expectations have fallen to 10.6%, and historical relationships suggest market returns over the next 12 months are more likely to be positive; fourth, foreign investor sentiment is improving at the margin, with FII shifting from heavy outflows in the first half to net inflows so far in July; fifth, factor allocation should favor large-caps, add momentum exposure, and retain high-quality defensive exposure.

Analysis framework

The report uses a quantitative strategy framework to assess the Indian equity market across dimensions including valuations, earnings revisions, long-term earnings expectations, fund flows, crowding, industry dispersion, and factor performance. At the asset level, it compares large-caps with SMIDs; at the style level, it compares factors such as momentum, quality, growth, high volatility, low volatility, and value; and at the industry level, it identifies areas with cheap valuations, improving earnings, or lower crowding.

Methodology notes

• Valuation analysisForward P/E, P/B and 10-year historical z-score

  Valuation mean reversion

  The report compares 12-month forward P/E and P/B for the Indian market and sectors against their 10-year historical averages and standard deviations to determine whether valuations have retraced to attractive ranges.

• Earnings revision analysis6-month and 12-month EPS Momentum

  Earnings momentum

  The report uses earnings upgrade and downgrade trends to identify early signals of earnings recovery and pays particular attention to stocks whose earnings momentum has improved over the past 6 months.

• Fund flow and positioning analysisFII, DII, SIP and GEM active fund underweight

  Investor sentiment and capital returning

  The report assesses whether market liquidity conditions in India are improving at the margin through foreign flows, domestic flows, systematic investment plan flows, and changes in underweight positions by global emerging market funds.

• Factor allocationMomentum, Quality, Large-caps and SMIDs comparison

  Style rotation

  The report believes momentum valuations are already near low levels and earnings support is improving, large-caps are more attractive relative to SMIDs, and the quality factor provides defensiveness in an uncertain environment.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• India equities

  Core asset under research

  Strengths

  Valuation pullback, improving foreign investor sentiment, and lower long-term earnings expectations create a backdrop for positive returns.

  Weaknesses

  The overall earnings downgrade cycle has not clearly bottomed, and the recovery remains selective.

  Comparison

  Performance lagged Korea and Taiwan in 1H26, but relative attractiveness has risen after volatility in regional AI/technology trades.

  Risks

  Further earnings downgrades, unsustained foreign inflows, and geopolitical uncertainty.

• India large-caps

  Preferred allocation direction

  Strengths

  More attractive valuations and more visible improvement in earnings revisions.

  Weaknesses

  If market risk appetite rebounds quickly, they may temporarily lag high-volatility names or SMIDs.

  Comparison

  The report explicitly prefers large-caps over SMIDs.

  Risks

  If earnings support from leading stocks fails to broaden out, the allocation advantage could narrow.

• India SMIDs

  Relatively underweight direction

  Strengths

  Some high-volatility and SMID names have rebounded strongly since April.

  Weaknesses

  Valuation and earnings downgrade pressures remain elevated.

  Comparison

  Relative to large-caps, the report views SMIDs as less attractive for near-term positioning.

  Risks

  If liquidity and risk appetite improve, SMIDs may outperform in the short term.

• Momentum stocks

  Recommended to increase exposure

  Strengths

  Valuations have fallen to around or below the 10-year average, earnings support is relatively strong, and the crowding cycle is improving.

  Weaknesses

  They were under pressure during the earlier market decline and still rely on continued earnings momentum.

  Comparison

  The report sees momentum and large-caps as the styles that are currently relatively cheapest and enjoy stronger earnings advantages.

  Risks

  If the momentum reversal fails or earnings improvement stalls, drawdown risk would be high.

• High quality stocks

  Defensive holding

  Strengths

  Among the most resilient in 1H26, with earnings upgrades still relatively intact, making them suitable for an uncertain environment.

  Weaknesses

  Valuations remain expensive, at about +1SD above the 10-year average.

  Comparison

  They have performed better than the low-volatility factor, which significantly lagged the market in 1H26.

  Risks

  If risk appetite rises sharply, high-quality defensive style may underperform.

• Financials and Technology

  Valuation-attractive sectors

  Strengths

  Valuations are near COVID lows, with Financials forward P/E at about -1.9SD and Technology at about -1.5SD.

  Weaknesses

  Some financial stocks remain highly crowded, and Technology is still affected by volatility in regional tech trades.

  Comparison

  They offer better valuation appeal relative to more expensive sectors such as Healthcare, Industrials, and Utilities.

  Risks

  Insufficient earnings recovery or continued fund outflows would limit rerating.

Key data

• MSCI India forward P/E18.6xDown from the 23.2x peak in 4Q24, below the 10-year average, at about -0.7SD.
• MSCI India P/B3.3xAbsolute P/B is still slightly above the average, but relative P/B versus emerging markets is already near COVID lows.
• India long-term earnings growth expectations10.6%Declined from 12.9% in January 2026 to 10.6% in June 2026, below the long-term average.
• FII outflows in 1H26-US$29bnSignificantly larger than the roughly -US$8bn outflow in the same period last year.
• FII inflows from July 2026 to date+US$1.8bnAs of mid-July in the report, foreign outflows had slowed and turned into net inflows.
• DII inflows in 1H26US$49bnUp about 19% from US$40bn in 1H25.
• GEM active funds' India underweight-2.1%Narrowed from -2.7% in February 2026 to -2.1% in May.
• Performance of India momentum factor since April+15%The report believes the momentum rebound may strengthen further.

Impact & implications

The implication for portfolio allocation is that India is no longer merely a funding source for regional AI/technology trades. As valuations cool and foreign capital returns, conditions are now in place to gradually increase exposure. However, because earnings recovery remains selective rather than broad-based, allocation should avoid indiscriminate buying of the market. Priority should be given to large-caps, reasonably valued momentum stocks with improving earnings momentum, while high-quality stocks should be used to maintain defensiveness. At the sector level, Financials and Technology offer valuation appeal; Materials and Consumer are supported by earnings recovery; and Energy, Staples, Technology, and Real Estate benefit from lower crowding.

Risks

• India’s overall earnings downgrade cycle has not clearly bottomed, and the average stock still faces faster downgrades.
• The recovery is currently selective rather than a broad-based fundamental rebound.
• July foreign inflows are still at an early stage; if AI/technology trades attract capital again, India may once again become a funding source.
• Valuations for the quality factor remain expensive, and buying at too high a price would compress return potential.
• SMIDs still face earnings and valuation pressure, and chasing the rebound in high-volatility names carries risk.
• Geopolitical and macro uncertainty remain high, so the report recommends retaining defensive exposure.

What to watch

• Whether FII net inflows can extend from the short-term improvement in July into a sustained return of capital.
• Whether GEM active funds' underweight to India continues to narrow.
• Whether earnings upgrades in large-caps broaden to more sectors and to mid- and small-caps.
• Earnings revision trends in Materials, Consumer, Financials, and Technology.
• Whether India’s long-term earnings growth expectations remain low and create a positive-return window over the next 12 months.
• Whether momentum stock valuations, crowding, and earnings momentum improve in sync.
• Whether DII and SIP fund flows slow enough to affect market support.