Global investment bank Jefferies has significantly rebalanced its India Model portfolio, demonstrating a strategic pivot towards large-cap equities. The firm announced the addition of Kotak Mahindra Bank Ltd (KMB) and Welspun Corp to its holdings, alongside an increased weighting for Reliance Industries Ltd (RIL).
Strategic Rationale Behind Portfolio Adjustments
Jefferies cited several key factors for these shifts. The decision to raise its stake in Reliance Industries Ltd stems from attractive valuations and potential for upgrades, particularly driven by anticipated higher gross refining margins (GRMs).
Kotak Mahindra Bank Ltd was included due to the perceived removal of a "leadership overhang" and expectations of accelerating growth beyond current 15% levels. For Welspun Corp, Jefferies foresees significant benefits from a multi-year upcycle in oil and gas infrastructure spending across the US and the Middle East, bolstered by its local manufacturing capabilities.
Why Large-Cap Stocks Now?
The investment bank's broader thesis emphasizes a more favorable risk-reward balance for large-cap stocks compared to mid-caps. This view is supported by better relative valuations and a narrowing gap in earnings growth projections for fiscal years 2026-2028. Jefferies noted that the MSCI India index has seen a 10% decline from its August peak, underperforming MSCI Emerging Markets by 14 percentage points, largely due to concerns over interest rates.
This market correction has pushed price-to-earnings (PE) ratios below their long-term average, making large-cap companies with below-average valuations potential "hiding places" for investors.
Navigating the Interest Rate Environment
Jefferies highlighted that while the Indian yield gap with the US is at two-decade lows, the inflation gap is also narrower. Unlike the more aggressive tightening seen in 2022, the firm anticipates a shallower rate hike cycle in India, projecting a mild 50-75 basis point increase, with the first hike possibly in the October RBI meeting.
Globally, markets are grappling with rising yields, with the US 10-year Treasury yield surpassing 5% and similar trends in Japan, the UK, and Germany. This environment is compounded by concerns over worsening fiscal balances, reduced participation from foreign central bank buyers, and substantial debt-funded capital expenditure for AI development.
Christopher Wood, Jefferies' global equity strategist, warned that US 10-year yields above 5% pose a growing risk for US equities.
Valuation Insights
Historical data shows that the MSCI India PE compressed by 22% during the RBI's accelerated rate tightening phase from January to June 2022. More recently, since August 2026, the Indian market decline has brought the MSCI India to 18.4 times its 1-year forward PE, which is 7% below its 10-year average. Despite this, its valuation premium over EM peers remains elevated at 90%. Notably, companies representing 39% of the MSCI India's weight are currently trading at valuations 10% below their historical averages.