Synopsis

The May 2026 strategy is shaped by one overriding theme: a Middle East conflict that has interrupted a healthy global growth cycle, creating a supply-side shock that clouds both the macro and earnings outlook — even as financial markets have largely looked past it.

Global context - IMF has cut CY26 global growth to 3.1% (from ~3.4% pre-conflict), with inflation revised higher. The blow is partially cushioned by US tariffs settling below feared levels and strong AI- and energy-driven corporate earnings. Markets remain resilient, banking on a diplomatic resolution.

India - Resilient but moderating. FY27 GDP growth is expected ~100 bps below FY26's ~7.4%. Recent activity strength is partly front-loaded (precautionary inventory build-up), and as this unwinds through 1HFY27, underlying momentum will slow. Manufacturing and the formal sector are holding up; energy-intensive industries are lagging. An adverse monsoon outlook (El Niño) adds uncertainty.

Inflation & rates - CPI is rising but within the RBI's tolerance band. The RBI holds the repo at 5.25% — the policy bias has shifted from potential easing to a pause, with cuts unlikely near-term. Long-end yields are expected to remain sticky.

Earnings & valuations - Near-term earnings are being trimmed (1–3% cuts to FY26/27 estimates), though the medium-term ~16% EPS CAGR for FY26–28 remains broadly intact. The market is valued, not cheap.

Flows & sentiment - FIIs have sold ~USD 20B in CY26 — the largest outflow in two decades. Domestic MF flows (~INR 40,000 crore/month) are providing a counterbalance, though SIP stoppage ratios are rising. India's growth-valuation trade-off looks unattractive versus EM peers; the TINA factor no longer applies.

Strategy - Mild overweight on equities via gradual deployment over 4–5 months, favouring large-cap-biased multi-cap strategies and sector rotation. EM equities recommended as a diversifier and INR hedge. On fixed income, prefer short-to-medium accrual; avoid long duration. Gold retains a strategic allocation. Near-term market direction will be driven more by geopolitics and crude prices than by domestic fundamentals — earnings recovery is deferred, not broken.