'Ripe For Long-Term Alpha Creation': Jefferies Bullish On India's Growth Story, Favours THIS Segment

The Indian stock market is slowly regaining momentum on expectations of an earnings boost from the recently-approved next-gen GST 2.0 reforms. D-Street analysts believe autos are the major beneficiaries of the GST cut, and the segment too, has responded positively. A huge demand for automobiles post-Sep. 22 will keep the auto stocks resilient despite the recent run up.

However, the underperformance of the broader market is a distinct trend now. While the Nifty is down 0.65% in the last one year, Nifty Midcap 150 and Nifty smallcap 100 are down by 1.9% and 8.08% respectively. The high valuations in the smallcap segment of the market is getting corrected.

In the current market scenario, global brokerage Jefferies believes that the Indian stock market is still 'ripe for long-term alpha creation, despite the near-term uncertainty due to external and geopolitical headwinds. Jefferies noted India that India has been underperformer among the emerging markets this year. However, it favors India's small and midcaps on growth curves.

Jefferies noted that India has been a major laggard facing tough geopolitics in 2025. Due to its extremely light positioning, India has been a significant underperformer in the emerging market space this year. FPI flows turned negative, with India seeing tariff uncertainty while China is enjoying a retail-led bull market.

In India, momentum is also correlated to strong FPI flows, which have been missing. Even domestic MF sentiment is subdued as the record inflow in July was followed by rising cash levels. Slowing downgrades, reasonable PE/G, and diminishing PE premium are some of the triggers weighing on markets so far.

However, despite the slowdown, Jefferies believes that some of the positives for India include easing downgrades, PE/G are in line with the region/China, and a post-COVID low in PE premium to EM, has rerated sharply this year.

"Growth expectations have also normalized, and we see a10% EPS CAGR in FY3/26-27. Our Al-based earnings sentiment analysis further suggests a stable earnings environment," said Jefferies on the outlook for Indian markets.

Despite the near-term uncertainty, Jefferies believes that the conditions are ripe for long-term alpha creation, especially within small and midcap growth. The growth of small-and midcaps are in focus, according to the brokerage. Small-and midcaps dropped sharply at the start of the year, but are recovering.

"Mid-caps are expensive but trade at a lower PE/G than large caps and have similar revisions. Small-caps have an even lower PE/G. Overall, SMIDs EPS growth is much higher than the rest of Asia/EM, while large-cap growth is uninspiring. Furthermore, large-cap return dispersion has fallen sharply, limiting alpha. We screen for SMID cap growth with solid revisions," said Jefferies.

On the market strategy, Jefferies suggests that investors should avoid extreme factor exposure, including momentum in hibernation. The brokerage highlighted that 'compounders are performing the best this year.' It added, ''We also like the stability of value laggards and alpha opportunity of multibaggers.''

Recent SEBI changes and flat market returns have sparked investor's interest in Specialized Investment Funds (SIFs), a HNI-focused product that allows unhedged short positions of up to 25% of NAV. ''In that context, we introduce a long-short and short-only strategy using momentum, revision, FCF, PE/G, and size factors," said Jefferies.