Synopsis
Darkest hour before dawn
Global backdrop
Global growth is holding up at a projected 3.1% in CY26, supported by strong AI investment. That cushion is finite, though. Concerns about AI monetisation, Brent crude at around USD 111/bbl amid the West Asia conflict, and sticky inflation are pushing developed market rate expectations higher.
India: growth and earnings
India’s growth outlook has been upgraded, and high-frequency indicators remain firm. Growth support is shifting towards exports and private capex. Early Q2FY27 results show revenue up 23% and profit up 28% YoY, broad-based across market caps. Consensus expects growth to moderate in 2HFY27, weighed down by a weak monsoon, elevated fuel prices and a softer rupee.
Rates and inflation
The RBI raised repo by 25 bps to 5.50% in October, its first hike since February 2023, as inflation approaches the 6% ceiling and the INR stays under pressure. Consensus expects two to three further hikes, and tight liquidity has already lifted short-term yields.
Valuations and flows
Nifty 50 and Midcap 150 forward P/Es have fallen below their –1 standard deviation levels, and small caps now trade below their long-term mean. FII outflows have reached a record ~USD 33bn in CY26 YTD. Record SIP inflows and steady DII buying have absorbed much of this selling. India remains under-owned globally, which leaves room for mean reversion once catalysts emerge.
Portfolio strategy
- Equities: We retain a marginally overweight stance. We favour high active share multicap strategies, portfolios tilted towards India’s manufacturing buildout, and emerging market equities offering strong earnings growth at reasonable valuations.
- Fixed Income: In the near term, we prefer low-MTM and roll-down strategies, with short-to-medium duration accrual as the core. We remain neutral on long duration. We are selectively constructive on performing credit, REITs/InvITs and hybrid SIF strategies.
- Gold: Gold remains a strategic allocation, though Fed tightening may cap near-term upside.
Bottom line
Volatility is likely to persist. With earnings recovering and valuations reset, we see this as a disciplined opportunity to build quality portfolios for the medium to long term.
