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Notwithstanding Treasury interventions, driven by the busy issuance schedule of the US Treasury and AI hyperscalers, sticky inflation, and the absence of traditional large buyers in US G-Sec markets, US yields are here to stay higher for longer. Sustained higher US risk-free rates (~5%), when coupled with equity risk premium, India risk premium, and currency depreciation, would result in global (and US) investors seeing ~15% return as the floor for investing in Indian equities. Amid the onslaught of the trade war and the West Asia conflict, the Indian economy has shown high resilience, and corporate earnings have come in better than estimates. However, in a global environment shaped by higher US risk-free rates, earnings resilience alone will not be able to attract global investors, rather, it will be the visibility of higher growth for longer that will attract global investors. In this backdrop, we prefer high-growth new-age companies, cyclical turnaround companies, premium discretionary consumption, and select financials stocks.

Higher US yields are here for longer

Following the US Treasury’s announcement last week to increase the size of its long-dated Tbond buybacks (Treasury Twist) “to at least double” (up to $4bn vs $2bn), followed by media reports around the Treasury Secretary’s plan to use the Treasury General Account (TGA) of ~$1trn to support buybacks, US 10Y/30Y yields have eased by 7/10bps to 4.69%/5.21%. However, we see yields staying elevated owing to a confluence of factors, including:

1) the Treasury’s issuance schedule over the near-to-medium term

2) accelerated debt issuance by AI hyperscalers to fund their capex

3) relatively muted presence of traditional buyers like China, Japan, GCC, etc

4) sticky, high inflation.

Amid adverse external environment, Indian economy remains resilient

As India adjusted to the realities of the Trump administration’s trade war, the West Asia crisis drove a spike in crude and other raw material prices, while also creating supply chain uncertainties. Against this backdrop, the initial fear was of a weak earnings season and subdued economic activities in 1QFY27. However, 1QFY27 panned out well in terms of corporate earnings and broader economic outcomes. For now, management guidance for FY27 and analyst estimates appear to be holding up well.

Growth the only panacea to attract global investors until yields crash

In the past, when US (and DM) yields were lower for longer, slow-growing but resilient earnings companies (loosely referred to as defensive or quality stocks) made sense for US (or DM) investors investing in India. At present, in an era of higher US yields and AI-charged earnings growth in the US, the typical playbook of

1) a diversified market in terms of themes

2) resilient earnings

3) reasonable valuations (in the Indian context) is not sufficient to attract foreign flows. With US risk-free rates nearing 5%, coupled with the country risk premium, equity risk premium, and currency volatility, the required return from Indian equities would be ~15%. This means low-growth companies will not find favor, and better visibility of stronger growth over the medium term becomes a prerequisite to find favor with US (and DM) investors. This preference can change only if US yields were to crash, which we do not know when or how.

Our preference is for high-growth new-age companies and cyclical turnarounds

Against this backdrop of higher US yields, the divergence between flagship indices and broader market performance is likely to continue, in our view. A large weightage in NIFTY50 is attributable to defensive large-cap companies that are growing too slowly to justify ownership by foreign investors in the current environment. Given the divergence in earnings growth, we continue to see NSE500 outperforming NSE100, which in turn outperforms NSE50. We prefer high-growth new-age companies such as ETERNAL, PAYTM, LENSKART, PINELABS, ATHERENE, and URBANCO that offer better visibility of stronger growth over the medium term. Additionally, we prefer discretionary consumption names such as ETHOSLTD, TTAN, and TVSL, where the premiumization theme continues to support stronger growth, and cyclical stocks such as TMCV and GVTD, where growth tailwinds are strong. In the Financials space, our preference is based on risk-reward, where we see valuations as reasonable and growth continuing to stay strong or starting to accelerate. ICICIBC, UJJIVAN, MMFS, and SBIAMC are our preferred names in the Financials space.

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