Ahead of the Q2 earnings season, Jefferies has added Kotak Mahindra Bank to its model portfolio, increased weight on heavyweight Reliance Industries (RIL) to overweight and trimmed exposure to NBFCs, real estate and consumer discretionary stocks.
The brokerage has raised its weight on largecaps, arguing that the risk-reward profile is improving as global and domestic bond yields rise. “Large caps, which are below average valuations, may offer hiding places,” Jefferies analysts said.
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Yield pressure
Bond yields have been climbing across major markets. The US 10-year Treasury yield has moved above 5%, its highest level in more than two decades, while Japan’s 10-year yield has crossed 3%, a 30-year high. Government bond yields in the UK and Germany have also risen.The increase reflects more than just inflation concerns. Markets are also factoring in deteriorating fiscal balances, lower participation from foreign central bank buyers and large debt-funded capital expenditure linked to artificial intelligence infrastructure, according to Jefferies.
The rise in global yields has spilt into India. The 10-year Indian government bond yield has increased by about 45–50 basis points over the past two months, with markets pricing in further monetary tightening.
India’s yield premium over US Treasuries is now close to a 20-year low at around 2 percentage points. However, Jefferies argues that the decline in the yield differential is partly justified because India’s inflation premium over the US has also narrowed.
India’s average CPI inflation was 6.1 percentage points higher than US inflation between fiscal 2007 and fiscal 2016. That gap fell to about 1.5 percentage points between fiscal 2017 and fiscal 2026.
RBI rate cycle may be shallower
Jefferies expects the Reserve Bank of India to raise rates at its October 2026 meeting, but believes the tightening cycle will be less aggressive than the previous one.The RBI raised rates by 250 basis points during the 2022 tightening cycle following policy normalisation and a crude oil-driven inflation shock. This time, Jefferies expects a total rate increase of 50–75 basis points.
The brokerage said real interest rates in India remain broadly neutral, with the current repo rate at 5.25% and the RBI’s CPI projection for the March 2027 quarter at 5.5%. Overnight markets are already pricing in two 25-basis-point rate hikes by December 2026.
Even a relatively shallow rate cycle, however, could lead to further valuation compression.
During the earlier tightening cycle that began in 2022, MSCI India’s price-to-earnings multiple fell 22% from its January peak through June. In the narrower 2018 rate-hike cycle, the compression was about 7%.
Since August 2026, Indian equities have declined, bringing MSCI India’s one-year forward P/E to 18.4 times — 7% below its 10-year average. Yet the market still trades at a 90% valuation premium to emerging-market peers, compared with a 10-year average premium of 64%.
Largecaps vs midcaps
The key reason for Jefferies’ preference is the widening valuation gap between largecaps and midcaps.The Nifty 100 currently trades at a 30% discount to the Nifty Midcap 150 on forward valuations. The average discount over the past decade has been 20%.
At the same time, Jefferies expects the earnings growth gap between the two segments to narrow materially over fiscal 2026–28. That combination, a larger valuation discount and improving relative earnings prospects, has strengthened the case for largecaps.
The brokerage also noted that stocks representing 39% of the MSCI India index weight trade at valuations more than 10% below their historical averages. By comparison, stocks accounting for 25% of the index trade more than 10% above their historical averages.
Jefferies portfolio rejig
Reliance Industries has been added at an attractive valuation, according to Jefferies. The stock trades at 8.4 times one-year forward EV-to-EBITDA, around 23% below its 10-year average. Jefferies also sees the possibility of upgrades if refining margins improve.Kotak Mahindra Bank has been added following the removal of a leadership overhang. Jefferies expects potential growth acceleration to above 15%, while the stock trades at 1.8 times estimated fiscal 2027 price-to-adjusted book value, about a 50% discount to its 10-year average.
Welspun Corp is expected to benefit from a multi-year upcycle in oil and gas infrastructure spending in the US and the Middle East, supported by local manufacturing. Jefferies forecasts EBITDA and earnings per share compound annual growth of more than 30% between fiscal 2026 and fiscal 2029.
The brokerage has trimmed exposure to rate-sensitive stocks, including NBFCs, real estate and consumer discretionary names such as Eicher.
(Disclaimer: This article has been written by Nikhil Agarwal, who is not a SEBI-registered Research Analyst or an Investment Adviser. Nikhil Agarwal and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here)
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