Indian Investors' Gold & Stock Surge Curbs Foreign Funds

Manish Gunwani, Head of Equity at Bandhan Asset Management Company (AMC), has outlined a complex macroeconomic situation weighing on Indian equities. He attributes foreign investor caution not to weak fundamentals but to robust domestic demand for both stocks and gold.

Heavy gold imports strain the balance of payments, weakening the rupee. This currency depreciation erodes foreign investors' returns in dollar terms, creating a deterrent loop. Gunwani suggests this cycle requires global dollar weakness or currency adjustment to reverse and support renewed foreign capital inflows.

AI Lag and Trade Deal Concerns

Beyond currency issues, Gunwani noted India's lack of a substantial, index-heavy artificial intelligence (AI) play. This contrasts with emerging market peers like China, Korea, and Taiwan, which host many global AI leaders. Discussions surrounding a potential U.S.-India trade agreement have also raised India's perceived risk premium among foreign investors, even if direct economic impacts remain limited.

Shifting Gears: Small-Caps Over Large-Caps

After five years of outperforming nominal gross domestic product (GDP), large-cap earnings growth is likely to mirror nominal GDP growth of around 10-11% over the next three to five years. This suggests diminished upside potential from large-cap stocks compared with earlier investment cycles.

Gunwani is now more constructive on small-cap stocks than a year ago, citing the broad universe, ongoing technological shifts, and geopolitical changes that create scope for differentiated winners. He believes small-caps are the asset class most likely to outperform over a three-to-five-year horizon, despite potential near-term pressure from tight liquidity.

Strategy Adjustments

Tight liquidity can weigh on small-cap performance in the short run. Gunwani advocates for a gradual increase in exposure, noting his fund has reduced cash levels from as high as 14-15% six months ago as valuations in parts of the small-cap universe have become more attractive. This stance contrasts with some peers who are increasing allocations to large-cap stocks for capital preservation.

Sector Bets: Cyclicals and Lenders

On sectoral preferences, Gunwani highlighted global cyclicals, such as metals and shipping, as particularly attractive. This view is supported by resilient growth in the U.S. and signs of recovery in China. He also sees value in lenders trading at or below a price-to-book value of one, supported by strong household balance sheets and a low probability of major asset-quality issues.

Within the metals industry, gold finance is described as "expensive." However, industrial metals remain interesting, supported by U.S. resilience, European and Chinese recovery, and increased global capital expenditure driven by protectionist policies. Ferrous metals, particularly steel, are more dependent on China's policy choices and could benefit from a strengthening yuan against the U.S. dollar.

Bandhan AMC managed assets worth ₹609.27 crore as of December 31, 2025.