Summary
The global macro landscape entering 2026 is marked by structural shifts rather than cyclical noise. Power is gradually moving from the traditional G7 economies toward emerging blocs, led by China, while global monetary conditions remain accommodative despite elevated debt levels. Equity markets globally have shown resilience, but returns going forward are likely to moderate, making expectations management and asset allocation discipline critical.
For India, macro stability remains intact despite pressures from global trade uncertainty, slowing capital inflows, and fiscal constraints. While short-term volatility may persist, India’s contribution to incremental global growth, resilient consumption, and domestic savings continue to provide long-term support. Equity returns are expected to normalize into mid-single to low-double digits, reinforcing the case for balanced portfolios and realistic return expectations.
Global Economy
A profound structural shift is underway as BRICS economies, led by China, now surpass G7 nations in GDP terms on a purchasing power parity basis. The future trajectory of global markets will be significantly shaped by the evolving US–China relationship. Among the strategic choices available to the US, the current stance appears to lean toward coexistence and division of influence rather than outright confrontation.
Globally, debt levels across advanced economies remain elevated at around 130% of GDP. While central banks are expected to continue easing in 2026, the magnitude of rate cuts is likely to be lower than in the previous cycle. Overall monetary conditions remain accommodative across both developed and emerging markets, supporting growth, albeit at levels below the pre-pandemic trend.
A key risk emerging from global markets is Japan’s rising bond yields, which raise the possibility of a reversal in yen carry trades, potentially impacting global liquidity and asset prices. Other structural risks include the sustainability of AI-led investments, the durability of disinflation, and the long-term implications of de-dollarization
China and United States
China continues to rely heavily on manufacturing-led growth, supported by fiscal stimulus and export competitiveness. However, declining capacity utilization, subdued household consumption, and falling manufacturing capex highlight internal imbalances. While Chinese equity markets have rebounded sharply over the last two years, valuations remain anchored near levels seen nearly two decades ago, reflecting persistent structural concerns.
In the US, economic growth has surprised positively, driven largely by AI-related capital expenditure. However, this strength comes alongside rising unemployment, elevated debt of nearly $38 trillion, and a weakening dollar. Despite a significant depreciation in the dollar, foreign capital has continued to flow into US assets, creating a divergence from historical patterns. Whether this trend persists remains a key global market question.
Indian Economy
India’s macroeconomic performance has remained broadly in line with expectations. Government measures, including GST and income tax cuts and labor code implementation, have supported consumption. Industrial production has shown intermittent strength, though momentum remains uneven when averaged over recent months.
The key macro challenge lies on the external front. While the trade deficit remains manageable, capital account pressures have intensified due to weak net FDI inflows and sustained remittance outflows. This has resulted in a second consecutive year of balance of payments stress, requiring active intervention by the RBI to manage currency volatility.
Fiscal constraints have also become more pronounced. Revenue growth has lagged budgeted targets, forcing higher fiscal deficit utilization and raising the likelihood of expenditure rationalization. Despite these pressures, India remains a key contributor to global growth, accounting for nearly 20% of incremental global GDP growth on a PPP basis.
Earnings, Valuations and Market Positioning
Equity markets have undergone a meaningful correction, particularly in the small and mid-cap segments, leading to investor discomfort. Foreign investors were net sellers through 2025, driven by India’s relative underperformance versus peers and subdued earnings growth, especially in IT.
Valuations across market segments have diverged. Small caps continue to trade at a premium to historical averages, while large and mid-caps are closer to fair value. Market-cap-to-GDP remains elevated, but this is partially offset by profit-to-GDP ratios at all-time highs.
Looking ahead, earnings growth is expected to improve from high single digits in 2026 to mid-teens levels thereafter, supported largely by traditional sectors such as energy, utilities, metals, and industrials rather than new-age or AI-heavy investments.
Flows and Liquidiy
Domestic investors have remained consistent buyers, providing stability amid foreign outflows. FPI ownership has declined to decade-low levels, leaving India under-owned globally. While secondary market selling by active FPIs and private equity players may persist, passive flows could return if capital starts rotating out of US assets.
Asset Allocation and Outlook
The outlook for 2026 is more constructive than 2025, though volatility from geopolitics, trade negotiations, and global capital flows will remain. Equity return expectations need to be moderated, with high single-digit to low double-digit returns appearing more realistic.
Portfolio positioning favors:
- Neutral allocation to large and mid-caps
- Marginal underweight to small caps
- Emphasis on diversified, actively managed strategies
- Continued relevance of SIPs for long-term wealth creation
On the fixed income side, falling inflation and potential global index inclusion of Indian government securities could support bond inflows. Allocation to gold and silver remains relevant, supported by supply constraints, central bank buying, and rising industrial demand.
Closing View
The investment environment in 2026 is defined less by exuberance and more by realism. Structural global shifts, normalized returns, and selective opportunities argue for disciplined asset allocation and expectation management. While challenges remain, India’s long-term growth relevance, improving earnings visibility, and domestic liquidity support a cautiously optimistic outlook focused on steady compounding rather than aggressive return chasing.
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