Global diversification has become the buzzword for investors as India has lagged global peers in the recent past. However, this entire conversation is being driven by one data point: trailing 12-month returns, says Vikas Khemani, Founder and CIO at Carnelian Asset Management & Advisors.
He adds, “What investors are missing is that Indian have compounded at a CAGR of 14-15% over the last 20-25 years, a track record few major economies can match. Over 10 and 20 years, India is the most consistent performer in the EM peer group.”
Commenting on investment themes, Khemani says there is genuine opportunity in less-covered mid-cap and select small-cap businesses where the gap between fundamentals and recognition is still wide. Edited excerpts:
You’ve recently said that ‘rate of change’ matters more than cheapness. Give me one current Indian sector where the rate of change is improving despite ugly near-term numbers.
Yes. We see the manufacturing sector where the rate of change is improving. Manufacturing share in overall GDP is rising from 14% to 20% over the next 10 years. Further, is an equally compelling sector. The near-term numbers look mixed, but that is precisely where most investors make the error of reading the level rather than the direction. Credit growth is re-accelerating, the regulator is leaning growth-supportive, and asset quality repair is largely behind us. The rate of change here is firmly positive, and that is what matters.
Global diversification has become the latest talk of the town as Indian markets have not really moved for the last two years. What are the drawbacks or pitfalls investors are unable to realise?
The entire conversation is being driven by one data point: trailing 12-month returns. MSCI India at 3%, Korea at 207%, Taiwan at 118%. That single number is dominating investor psychology completely. What investors are missing is that Indian corporate earnings have compounded at a CAGR of 14-15% over the last 20-25 years, a track record few major economies can match. Over 10 and 20 years, India is the most consistent performer in the EM peer group. The longer the lookback, the better India looks.
What is being sold as “global diversification” is in practice largely a US equity allocation; the MSCI ACWI has the US at over 60% weight, dominated by 7-10 mega-cap tech names. That is concentration with a different flag. Then there are the silent costs: foreign equities require 24 months for long-term capital gains treatment versus 12 for Indian equity, short-term gains are taxed at 30%-plus versus 20%, and that is before LRS limits, TCS, and FEMA reporting. An Indian investor “diversifying” today is selling a market at ~120% mcap-to-GDP to buy one at ~230%, the highest Buffett Indicator in recorded history. That is not diversification. That is buying high to feel safe.
What role do you see international investments playing out in long-term wealth creation?
A purposeful but limited one. Every allocation must have a defined role: compounder, income, inflation hedge, or currency hedge. Global allocation makes genuine sense only where exposure is to industries structurally absent in India, where a real USD-denominated liability like overseas education requires asset-liability matching, or where a modest currency hedge serves a specific need.
The broader point is this. China was built on exports. Brazil runs on commodities. Taiwan and South Korea are hostage to the semiconductor cycle. India, by contrast, is structurally diversified across BFSI, manufacturing, consumer, services, and infrastructure. That breadth is not a weakness; it is a buffer and a source of compounding strength. When you zoom out, things look very good. The structural re-rating for India is in front of us, not behind us.
What is the strongest argument against the India bull case right now?
The near-term macro headwinds are real. The current geopolitical environment has created genuine pressure on India’s current account, the , and the import bill. Domestically, the earnings recovery went through a prolonged downgrade cycle in FY25 that eroded confidence. Valuations, while reasonable historically, are still modestly above long-term averages. My response is that these are cyclical pressures, not structural impairments. India has built a very nice foundation over the last decade: digital infrastructure, physical connectivity through roads, railways, ports and airports, and landmark reforms including GST, the IBC, and RERA. Two-thirds of India’s population is of working age, making it the youngest major economy in the world at a time when China is ageing and most developed markets face shrinking labour pools. More earners means more consumers. More consumers means . No economy grows in a straight line, and short-term volatility will always create moments of doubt. But when you zoom out, things look very good.
If forced to pick one: what is the single most important driver of Indian equity returns over the next five years — earnings growth, re-rating, domestic liquidity, or financialization of savings?
Earnings growth. Everything else is a multiplier, not a driver. Re-rating amplifies earnings but does not create them. Domestic liquidity and financialization of savings are powerful tailwinds, but they support the signal; they do not generate it.
Indian corporate earnings have already compounded at 14-15% CAGR over 20-25 years. The earnings downgrade cycle has now bottomed. The five themes I believe will drive wealth creation through India’s Amritkaal period-manufacturing scaling from 14-15% to 20-25% of GDP, financials deepening as savings formalise, consumption premiumising across and lifestyle categories, services including IT scaling further, and infrastructure spending at a historic pace all of these are fundamentally earnings stories. That earnings trajectory over the next five years is the one variable that will determine everything for investors.
In an AI-enabled market where everyone can summarise filings instantly, what new edge has emerged that wasn’t available five years ago?
The commoditisation of information is real. If every analyst can summarise a filing in seconds, that is table stakes, not edge. The edge has moved upstream to the quality of frameworks and questions brought to data. At Carnelian, our CLEAR framework evaluating cash flows, liabilities, earnings quality, asset quality, and governance risks is a structured lens that AI can assist with but cannot replicate. Forensic diligence on related-party transactions and management pattern recognition across cycles remain areas where human judgment dominates.
The more significant edge, though, is behavioural. Successful investing requires separating temporary fear from long-term structural business strength. No AI tool can manufacture that conviction or the patience to hold through underperformance. As information edges compress, temperamental edge becomes the last durable moat and it always was.
FII outflows are another trigger making headlines. Do you think retail SIP culture is giving them an easy exit?
Earlier, if sold a billion dollars, markets would collapse. Today they have sold tens of billions and markets are still not corrected severely. That is not because retail investors are passively subsidising FII exits; it is because Indian capital markets have structurally matured. The argument that domestic depth is a negative treats market resilience as a problem. It is precisely the opposite. A market with 150 million-plus demat accounts and ₹25,000 crore-plus in monthly SIP flows is a more stable and deeper market. FIIs, when they sell India, are making a tactical allocation call. They will return, because India’s fundamentals demand representation in any serious global portfolio. The retail SIP investor who stays the course benefits from both the stability those flows provide and the attractive re-entry that FII selling creates.
Do you think FIIs are missing out by turning away from India?
Goldman Sachs projects India’s share of global equity market cap rising from ~3% today to 12% by 2075, the largest increase of any country. Active global managers are running 2-3% below benchmark weight on India right now. That is a significant opportunity cost.FIIs who rotated into China on cheap valuations are sitting on a negative 4% CAGR over five years on MSCI China. Cheap alone does not work, governance, capital allocation, and rule of law determine returns. India offers all three, at a scale and growth trajectory no other emerging market can currently match. The manufacturing opportunity alone as a sector is moving from 14-15% to potentially 20-25% of India’s GDP is being significantly underestimated. Those turning away today would revisit that decision within 18 to 24 months.
Which part of the market feels most crowded to you?
The , heavily covered universe is efficiently priced; information edge there is essentially zero. Genuine opportunity persists in less-covered mid-cap and select small-cap businesses where the gap between fundamentals and recognition is still wide. Certain AI-adjacent and defence-themed names feel like excellent businesses, but valuations already price a very optimistic scenario, and the margin of safety is thin. Manufacturing, by contrast, has an overwhelming structural case but has not yet attracted frothy institutional crowding. That is where patient, conviction-driven capital tends to do best. In investing, big money is made by being a contrarian the edge lies in resisting the instinct to follow the crowd.
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