Fickle Portfolio Investors (FPI): valuation and theme over fundamental growth

The Pain Is Real - But So Is the Pattern

The Nifty 50’s earnings growth decelerated to the 7-8 per cent range in FY26, after the 19 per cent CAGR enjoyed in the post-COVID boom years of FY20 to FY25 (Source: NSE Market Pulse, February 2026). This represents a regression to the mean for investors who joined the market after 2020 and a disappointment for those who have a longer memory.

Consider the data: over a 23-year period, the Nifty 50’s earnings compounded at approximately 12per cent annually from 2002 to 2025. However, no economy can sustain large-cap earnings growth permanently at this rate. What surprised markets was the synchronised nature of the shortfall; cement, consumption, FMCG, IT and automotive sectors all disappointed simultaneously.

The NSE Market Pulse (February 2026), based on nine months of actuals, projects full-year FY26 Nifty 50 earnings growth of approximately 12 per cent and 15.7 per cent for FY27. This implies a CAGR of 13.9 per cent for FY25 to FY27.  This figure is positioned towards the optimistic end of the broader research consensus, which places the same compound annual growth rate (CAGR) in the 11 to 14 per cent range, depending on assumptions regarding rural recovery, commodity costs and Reserve Bank of India’s interest rate cycle.

The NSE’s Earnings Revision Indicator (ERI), which tracks analyst upgrades and downgrades across Nifty 50 constituents, has slipped slightly negative, with more downgrades than upgrades. However, the NSE notes the deterioration is slower than in early 2025, suggesting the downgrade cycle may be nearing its end. Other research houses covering the broader market (top 200 companies) estimate the FY25–27 earnings CAGR in a range of 13 to 16per cent, depending on assumptions about commodity costs, rural recovery, and the RBI’s easing cycle.

Why FPIs Really Left: Valuation Arbitrage, Not Fundamentals

The narrative surrounding FPI outflows warrants closer examination. It is tempting to interpret the sustained selling as a judgment on India’s fundamentals. This is not the case. At its core, it reflects a valuation arbitrage trade; a rational reallocation of capital once global alternatives began offering more attractive entry points relative to India’s premium multiples.

Data from the National Securities Depository Limited (NSDL) indicates that foreign portfolio investors (FPIs) withdrew approximately Rs 1.66 lakh crore from Indian equities during the entire calendar year 2025. In the first four months of 2026 (January–April), they withdrew Rs 1.92 lakh crore, exceeding the total for the previous year in less than a third of the time.

In the first four months of 2026, foreign portfolio investors (FPIs) sold more Indian equities than in all of 2025, a record outflow. However, the critical point is that China or South Korea have always been available as an emerging market investment destination for FPIs. The change is not the existence of alternatives but the magnitude of the valuation differential.

The Hang Seng trades at approximately 12–13 times trailing earnings, roughly half of India’s multiple. The Shanghai Composite is near 16 times. India’s price-to-earnings (P/E) premium over the broader emerging market (EM) universe, which had increased to an extreme 150 per cent in 2022–23, has now compressed to approximately 67 per cent – close to the historical average of 63 per cent. For short-cycle foreign institutional investor (FII) allocation models, even a 50–60per cent premium is difficult to justify when China at 16 times offers artificial intelligence (AI) tailwinds through Alibaba, Tencent and DeepSeek, and when South Korea’s semiconductor cycle is at an inflexion point.

This is a valuation rebalancing, not a fundamental indictment of India. The country’s GDP growth trajectory, demographic dividend and domestic demand drivers have not changed. What has changed is that the premium India commanded – rightly for structural reasons – was temporarily priced in excess of what global allocators could defend.

The Grass Is Greener? Let's Examine the Alternatives

FPIs argue for rotating out of India due to cheaper valuations in China and other EMs, the AI narrative favouring the US and Taiwan, and a perception that India lacks a direct AI infrastructure play. However, examining the alternatives over a meaningful time horizon is necessary.

China: The Cautionary Tale of Price Without Patience

The Shanghai Composite Index was trading at approximately 1,700 points in May 2006. Today, twenty years later, it trades near 4,100 points, representing a price gain of approximately 140 per cent over two decades or less than 5 per cent per annum (excluding dividends). An Indian retail investor who invested in a Nifty 50 index fund in 2006 would have seen their capital multiply several times over in the same period.

China’s Shanghai Composite has returned approximately 140 per cent in price terms over 20 years, yielding a compound annual growth rate of 4.5 per cent. The Nifty 50 has delivered over 15 per cent CAGR in the same period. While China’s lower price-to-earnings ratio is real, it reflects a market where earnings growth has been structurally dependent on state-directed credit and a prolonged deleveraging cycle in the real estate sector. Neither of these factors reliably compounds for outside investors. The discount to India is therefore justified.

China’s structural challenges include a multi-year real estate sector deleveraging, an ageing population limiting consumption growth, manufacturing oversupply causing deflation, and persistent geopolitical risk. While DeepSeek’s AI capability surprised global markets in early 2025, corporate governance, state intervention, and regulatory unpredictability remain significant risks that a lower PE ratio can’t fully address.

Taiwan: One Company Is Not a Market

Taiwan’s stock exchange has been a remarkable bull market story this decade. In early 2026, the TAIEX surpassed 30,000 points, with total market capitalisation reaching around $3.4 trillion, approaching Canada for the world’s sixth-largest equity market. TSMC holds about 30-35per cent of the TAIEX’s total market capitalisation, with its own market cap at around $2 trillion. On the other hand, 65per cent of the listed firms on the TAIEX trade below their 240-day moving average. (Source: Taiwan Stock Exchange (TWSE), January 2026; Wikipedia/TSMC).

Investing in Taiwan is, for practical purposes, a concentrated bet on one company’s ability to remain the world’s most advanced chip foundry and on geopolitical stability in the Taiwan Strait. Both propositions are plausible, but neither is a certainty.

South Korea: The Chaebol Concentration Problem

South Korea’s KOSPI index surged in 2026, driven by the semiconductor cycle, reaching 7,400 points in May with a 75.2 per cent year-to-date gain. Samsung Group alone holds about 38.5 per cent of South Korea’s total market capitalisation. Including SK Group (mainly SK Hynix), their combined share exceeds 65per cent. In 2023, the top four chaebols—Samsung, SK, Hyundai, and LG - contributed 40.8 per cent to South Korea’s GDP. (Source: Korea Exchange; Seoul Economic Daily, May 7, 2026; Wikipedia/Chaebol).

This is not diversified exposure to the EM sector. It is a sector rotation trade into memory chips and AI silicon built on two family-controlled conglomerates. Investors who are bullish on Samsung and SK Hynix may be rewarded. Those seeking broad EM fundamentals should examine the specific investments they are making.

The United States: The Most Expensive Equity Market

The AI investment boom involving NVIDIA, Microsoft, and Google is massive. However, the US market’s valuation is extremely high. The total stock market capitalisation is now around $72 trillion, which is 226per cent of US GDP. The US holds nearly 49 per cent of the global equity market capitalisation, while its share of global GDP is about 26 per cent in nominal terms and 15–16 per cent in purchasing power parity (PPP) terms.

The US market warrants a premium for the quality of its technology companies. However, it does not necessarily deserve more than two-fold to GDP unless one assumes that S&P 500 earnings will compound indefinitely above economic growth. Historical evidence has been unkind to that assumption.

What India Actually Has: The Structural Case

It is true that India lacks a domestically-listed AI infrastructure play comparable to NVIDIA, TSMC or Samsung Semiconductor. While Infosys and TCS are AI service integrators, they do not constitute the foundational infrastructure layer. This represents a significant gap in India’s equity narrative for this specific cycle. However, India possesses a feature that most other markets lack at this scale: genuine broad-based structural growth that is not contingent on a single technology cycle, company or geopolitical scenario.

India contributes approximately 7.9–8.5 per cent of global GDP in purchasing power parity terms - the third-largest economy by this measure — and is projected to contribute 9.66 per cent by 2029 (IMF, October 2024). On incremental global GDP growth in purchasing power parity terms, India has been contributing an estimated 15–16 per cent of the annual increment. (Source: IMF World Economic Outlook April 2026; StatisticsTimes.com).

This structural growth is based on pillars absent in the alternatives FPIs are rotating towards: the world’s largest working-age population, a financial inclusion wave (Jan Dhan, UPI and digital credit) that has brought hundreds of millions into the formal economy, an infrastructure buildout raising long-term productive capacity and an emerging manufacturing ecosystem in electronics, defence and pharmaceuticals that is in its early stages.

The Domestic Investor: India's Structural Anchor

Perhaps the most significant structural development in Indian capital markets over the past five years has been the emergence of Indian retail investors as resilient market participants who do not react to volatility.

Monthly SIP contributions hit a record high of Rs 32,087 crore in March 2026. SIP AUM has reached Rs 13.9 lakh crore, approx. 20 per cent of the mutual fund industry’s total AUM. SIP contributions have more than tripled since February 2020’s Rs 8,513 crore per month. (Source: AMFI, April 2026). Crucially, these flows have not faltered during FPI selling. From October 2024, the peak of FPI outflows, DII buying absorbed the selling with near-equal force. This represents a generational shift in Indian financial behaviour, not a trading phenomenon.

How to act in this situation

The data, synthesised without bias, indicates a distinct approach for various investor profiles.

For existing SIP investors: do nothing different. The SIP mechanism was designed for exactly this environment. The arithmetic of rupee-cost averaging through a correction period is quietly working in your favour. For lump-sum investors sitting on cash: stagger deployment over six to nine months via a systematic transfer from a short-duration debt fund into equity. This is neither aggressive nor absent - it is calibrated to the current valuation signal. For category allocation: tilt toward large-cap and flexi-cap funds. The valuation premium of small and midcap over large cap has narrowed from September 2024 extremes, but risk-adjusted entry points remain better at the large-cap end.

NSE Market Pulse (February 2026) projects a double-digit EPS recovery for FY27, with the FY25–27 CAGR estimated at approximately 14 per cent.  If this is achieved, current valuations are defensible, and a re-rating becomes possible. If corporate India delivers a 10–11 per cent return again, the market will require more time and a price correction to find equilibrium.

The Bottom Line

Foreign portfolio investors (FPIs) are responding to valuation signals. However, the markets they are rotating into each carry their own structural fragility. For example, China has experienced 20 years of near-flat nominal returns. Taiwan is a single-company bet. Korea is driven by two semiconductor groups, and the US market is trading at 226 per cent of GDP. India’s relative expensiveness is not a fundamental weakness. India is not broken; it is rebalancing. FY26 was a period of market uncertainty, and FY27 will be a pivotal year.

Joydeep Sen is a corporate trainer (financial markets) and author

Dr Vaishali Ojha is Asst Prof, NL Dalmia Inst of Mngt Studies and Research

(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)