There is room for some catch-up rally in India after the underperformance and improvement in earnings growth, said Sunil Koul, global emerging markets equity strategist, Goldman Sachs. In an interview with Nishanth Vasudevan, London-based Koul spoke about foreign investors' outlook for India, the semiconductor trade and the rupee, among other topics. Edited excerpts:

When you talk to global asset allocators, what are they saying about India?

We have got more incoming requests for calls and meetings on India over the last couple of weeks than we have had in the last three to six months. Both the economy and corporate earnings have held up pretty well. The recent RBI measures have given people comfort that the rupee may not depreciate meaningfully from current levels. And then there has been more volatility in semiconductor stocks and the AI trade over the last two or three weeks. There has been a growing desire to diversify portfolios away from the tech side, where positions have been very concentrated. So, we are arguing for performance in Asia to broaden a little bit and for some of the laggard markets to recover. In that sort of laggard recovery rally, India should be able to perform better as well.

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What has been the nature of the recent foreign flows into Indian markets?

The initial leg of the flows from mid-June was a broad-based pickup in interest in oil-importing markets, including India and South Africa. Moving into July, we have started to see some rotation flows within Asia. So, it's a mix of long-short allocations improving and some long-only money starting to allocate more.

Now that oil has rebounded, is that bad news for Indian equities?

Unless and until you see a full-blown war, which is not our base-case expectation, and an almost complete stoppage of flows, our year-end forecast for Brent crude is $80. That should be absorbed by the economy and the equity market. But, at the margin, it does put pressure on sentiment. If oil goes back to the $90-100 range, it will start to impact the macros and the market.

What is your reading of the recent sell-off in South Korea and Taiwan?
We are still pretty positive on the fundamentals of the memory space. Earnings of these companies in Korea and Taiwan have actually been strong, and the guidance has also been strong. We are in a cycle where demand is far stronger than supply. We are seeing tightness in the market, not just in 2026 and 2027, but well beyond 2027.

This year, because of pricing, Korea's earnings growth is more than 300%. Even for next year, we are expecting more than 30% earnings growth in Korea and about 30% earnings growth in Taiwan. So, what we are seeing is a positioning-led unwind, rather than any sort of fundamental concern about the cycle.

One thing that you hear often is that even after the run-up, valuations in Korea and Taiwan remain cheaper than India's.

That's why we still have Korea and Taiwan as overweight allocations, and India broadly neutral.

Earnings growth next year is about 30% in Taiwan and about 35% in Korea. In India, we are looking at 10% this year and 13% next year. Korea is still trading at six to seven times PE. Taiwan is a little bit higher in terms of multiples. If you look across the EM region, Taiwan is the most expensive market, and India is the second most expensive, both trading around 20-21 times. So, Taiwan and Korea still stack up better than India because there is higher earnings growth and, in Korea's case, a much cheaper valuation.

In India's case, there is room for a catch-up rally in India after the underperformance and improvement in earnings growth.

What kind of returns would you expect from India over the next 12 months?
Earnings growth should compound around 11% on a 12-month basis. And that's what our return upside for Nifty is. If you pick the right pockets within the market, you can probably get stronger returns, mid-teen double-digit returns.

So, what do you like in India?
Banks. It's one pocket of the market where valuations are reasonably cheaper relative to their range and relative to the rest of the market. And if foreign appetite starts to come back, it's one large liquid pocket of the market, which is viewed as a macro bet on India.

Energy self-sufficiency and energy reliance has put the spotlight on power companies, renewables, utilities and power-equipment makers. Tourism is a theme where there is a likelihood of some potential earnings upgrades.

Would you be comfortable looking at the Indian IT theme at these valuations?
We are still cautious on the IT services sector. Indian IT companies are still being forced to pass on some of the AI-related productivity benefits to end customers. So there is a little bit of a deflationary impact there, which adds uncertainty to the earnings outlook.

IT sector valuations have come down, but the feedback we get from clients is that, for the kind of growth relative to their global peers, Indian IT is still expensive. Some of these IT companies are trading at around 15 times PE, whereas US companies are trading at eight to nine times earnings.

Is the worst over for the rupee?
Yes. We have our three-month, six-month, and 12-month forecasts for the rupee between 94 and 96, which is where the currency is right now. A lot of support for the rupee is coming not necessarily from the FCNR or ECB flows, because they don't add to the spot acquisition of the rupee, but more from foreign flows into the bond market that could come through as a result of better taxation. But all of this is contingent on the oil, at the margin.

Which are the themes in India would you avoid?
IT is one category. The other is pharma stocks, which, in general, are trading at all-time high levels. The outperformance has largely been because the currency has been weaker, and people did not necessarily want to play the IT stocks, so pharma became the obvious choice. That said, we do like the hospitals.

Given that the sector is trading at around 35 times PE and has done really well, one of the trades we have been recommending is long Nifty Bank versus short Nifty Pharma. The risk-reward on that trade looks pretty attractive to us.