GlobalEconomy

Summary Global growth is expected to moderate in 2026 despite rising fiscal deficits across major economies. While central banks have maintained accommodative policies in recent years, their policy flexibility may narrow going forward as debt burdens rise. Rising unemployment, flattening global consumption, and potential unwinding of the yen carry trade present new macro risks. However, India remains among the faster-growing large economies alongside select Asian peers. Domestically, the Union Budget continues the government’s long-term strategy of infrastructure and manufacturing expansion while gradually improving fiscal discipline. Increased capital expenditure and structural policy reforms could support India’s medium-term growth trajectory if execution remains strong. Global Macro Environment Global growth is expected to slow in 2026 relative to both last year and long-term averages, even as fiscal deficits remain elevated. Central banks pursued relatively easy monetary policy during 2024–2025, but their room for further easing may narrow due to growing debt burdens and inflation considerations. At the same time: These factors create a backdrop of elevated market confidence despite weakening macro indicators. Yen Carry Trade Risk Japanese 10-year bond yields have reached multi-decade highs. For decades, Japan served as a major provider of global liquidity through the yen carry trade, where investors borrowed cheaply in yen to invest in higher-yielding assets globally. If rising Japanese yields trigger unwinding of these trades: However, India’s equity and bond markets appear to have limited exposure to yen carry trade flows, suggesting the impact may be relatively modest. China: Growth with Overcapacity China has demonstrated extraordinary industrial expansion, particularly in electric vehicles and power infrastructure. Key highlights: However, rapid capacity creation has led to declining capacity utilization and falling private investment. To counter this slowdown: Despite large-scale economic growth, Chinese equity markets have historically been volatile, experiencing multiple cycles of sharp gains and declines. A potential correction in Chinese markets could redirect capital flows toward India. United States: Growth Driven by AI The US economy has seen strong growth supported by domestic consumption and massive investments in artificial intelligence infrastructure. Technology companies including Amazon, Microsoft, Google, Meta, and Oracle are investing heavily in hyperscale data centers. These investments are estimated to contribute roughly 0.5% incremental GDP growth to the US economy. Since the pandemic: However, this growth has been accompanied by rising debt levels. Rising Debt Risks in the US Debt intensity in the US economy has increased significantly, meaning more borrowing is required to generate the same level of economic output. Key concerns include: Additionally, labour market data has seen repeated downward revisions, with employment figures revised lower by roughly 600,000 jobs over the past year. Income inequality has also widened significantly, with consumption increasingly concentrated among the top 10% of households. Dollar and Global Capital Flows The US dollar index has weakened significantly since early 2025. A weaker dollar, combined with declining US equity market dominance, could trigger global capital reallocation. Notable developments include: These dynamics may encourage global investors to diversify away from US assets. India Budget: Long-Term Structural Focus The Union Budget continued the government’s long-term economic strategy. Earlier budgets focused on: The latest budget increasingly emphasizes the services sector and future industries. Key positives include: Higher capital spending supports long-term productivity and economic growth. Policy Changes and Concerns Some policy measures generated debate: While some tax policies were viewed as inconsistent with earlier expectations, other reforms—including safe harbor provisions for global capability centers and improved buyback taxation rules—were seen as constructive. Execution: The Key Variable The effectiveness of several initiatives depends heavily on execution. Projects such as infrastructure funds, railway corridors, debt market reforms, and infrastructure guarantee schemes will require timely implementation to deliver intended benefits. Historically, certain financial market reforms—such as interest rate futures and credit default swaps—have struggled due to limited market adoption. Indian Economic Outlook The domestic economic outlook remains broadly positive. Government policy has supported consumption by directing financial support across several groups: In addition, the upcoming pay commission could inject roughly ₹3 lakh crore annually into the economy through salary and pension revisions, potentially supporting consumption growth. Risks Key risks to the outlook include: Opportunities India remains structurally well positioned due to: If global investors diversify away from US assets and China faces cyclical corrections, India could benefit from increased capital inflows. FundYantra View The global macro environment is entering a phase of slower growth but higher fiscal expansion, creating potential volatility across asset classes. India’s relative macro stability, improved public investment quality, and structural growth trajectory position it favorably within emerging markets. However, execution of policy initiatives and sustained capital inflows will remain critical determinants of market performance. Mutual fund investments are subject to market risks. Read all scheme-related documents carefully.

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: 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. Mutual fund investments are subject to market risks. Read all scheme-related documents carefully

Summary Fundyantra Market Outlook & Investment Strategy: December 2025 (Based on the outlook shared by Mr. Nilesh Shah, Kotak Mutual Fund) Navigating Global Headwinds and Opportunities The global economic landscape for 2026 is defined by cooling inflation and increasing fiscal expansion, particularly in G7 economies, where debt-to-GDP ratios are rising. As various governments initiate stimulus schemes, money printing is anticipated globally in 2026. While the US Federal Reserve (Fed) is likely to announce rate cuts, the number of further cuts may diminish over the coming years. Global growth is expected to slow slightly from 2025 levels, potentially leading to a marginal increase in inflation due to base effects Key Global Risks for 2026: Investors must monitor the escalating US-China conflict over technology, the ongoing debate regarding whether Artificial Intelligence (AI) represents a bubble or a genuine structural shift, the potential return of inflation driven by fiscal stimulus and rate cuts, and the threat of dedollarization. Furthermore, the rise in the 10-year Japanese bond yield (now around 1.93%) could disrupt the yen carry trade India: Resilience and Moderated Expectations India stands out as the only major economy that has successfully reduced its debt-to-GDP ratio between the subprime crisis and the COVID crisis. The second quarter GDP growth registered a strong 8.2%, propelled by an all-round performance across consumption, investment, and government spending. We project that India’s GDP growth will exceed 7% for FY26 and moderate to between 6% and 6.5% for FY27. The rural economy is also showing strength due to improving rural wages. However, the government is committed to fiscal prudence, meaning private sector investment must step up to maintain momentum, especially as capacity utilisation remains positive at around 75%. The Indian Rupee (INR) has depreciated against many major currencies, helping to increase exports to the rest of the world Equity Market Strategy: Focus on Earnings and Durability The Indian equity index is near all-time highs, but beneath the surface, many small-cap and mid-cap stocks have fallen significantly (15–20% or more) from their 52-week highs. Foreign Portfolio Investors (FPIs) have been net sellers, partly driven by India’s underperformance compared to other emerging markets and single-digit earnings per share (EPS) growth in the Nifty50 over the last six quarters. Conversely, Domestic Institutional Investors (DIIs) remain consistent buyers. Our market valuation, compared to the MSCI Emerging Market average, is now roughly in line with historical premium levels. While large caps trade near their historical average valuation (around 21.5 times), small caps remain significantly above their historical average. The outlook suggests that markets will be rangebound. With limited scope for further valuation rerating, future returns will be primarily driven by earnings growth. We expect earnings growth to rebound in FY27, led by sectors such as telecom, cement, auto, financial services, and chemicals. Opportunities in Fixed Income and Select Equity Sectors While caution is required in broad equities, specific opportunities are emerging: 1. Duration Opportunity in Bonds: The bond market appears attractive. India’s inflation is at a multi-decade low, yet the spread between nominal GDP growth and the 10-year G-sec yield is very narrow. This suggests that interest rates (yields) should be lower than they are currently, creating an opportunity in duration or long bonds (10-year plus maturity) for investors seeking better alignment. 2. Indian IT Sector: The IT sector is currently under-owned, with its weight close to a decade low at 10.2%. Historically, periods of extreme under-ownership precede very strong one-year returns. Furthermore, Nifty IT appears significantly cheaper than NASDAQ (22 times trailing P/E versus 38 times). The sector represents an “underowned, underperforming, and fairly priced bet” when compared to potentially overpriced global tech exposure. Debt and Alternative Assets Debt Market: Despite rate cuts by the RBI, 10-year and 30-year bond yields have moved up. Market participants are confused by the RBI’s communication, particularly regarding Open Market Operations (OMO), which the RBI states are for liquidity management only, not yield signaling. For high-taxpayers, Income and Arbitrage Fund of Funds continue to be a crucial tax-efficient vehicle, with tax rates dropping to 12.5% after two years, significantly lower than potential slab rates up to 39%. Gold and Silver: The outlook for precious metals remains positive, supported by consistent central bank buying (approximately 1,000 tons annually), limited mining opportunities, and global geopolitical uncertainty. Silver prices are supported by demand consistently exceeding supply, primarily driven by industrial uses. However, investors must remember that gold and silver lack intrinsic value (no cash flow or dividend); their value is based purely on perception. Therefore, investment in precious metals should always be a restricted component of a well-diversified portfolio Mutual fund investments are subject to market risks. Read all scheme-related documents carefully