Why Indian markets should not be 'underweight': Bernstein's Rupal Agarwal explains

Indian equities should not be "underweight" in the portfolio, despite the near-term challenges on the horizon, Rupal Agarwal of Bernstein said in her latest note on Friday, January 9.

Bernstein's Agarwal wrote that Indian equities are presenting a balanced risk-reward set-up, warranting a "neutral" stance.

Dalal Street has witnessed selling pressure recently after hitting record high levels at the start of the year. The Nifty fell over 260 points on Thursday, resulting in investor wealth worth ₹8 lakh crore getting wiped out.

Agarwal has highlighted potential near-term challenges for the Indian markets, which include stretched valuations, a potential rise in risk-premium, a challenging stock-picking environment, lack of macro recovery and better valuations and earnings support for stocks with a defensive tilt.

The third quarter earnings season has begun with companies such as GM Breweries reporting results and names like IREDA reporting today. For the Nifty 50 names, earnings kick-off on Monday, with IT majors TCS and HCLTech reporting results, followed by other IT and banking names over the week.

"We see positive tailwinds from strong earnings recovery cycle (heading towards upgrades), reasonable relative valuations, low-long term earnings growth expectations, potential return of foreign capital, resilient domestic flow and likelihood of US-India trade deal," Agarwal wrote in her note.

The Nifty 50 index is now down 500 points from its record high levels of 26,374 and is set for its first weekly loss in three on Friday.