The FTSE India index is now trading at a price-to-earnings premium of around 40% over the emerging markets index, down sharply from the 97% premium seen in September 2024. Following the recent correction, this narrower premium looks more attractive than before, presenting a potential opportunity for long-term investors to increase equity exposure, the brokerage said.
The brokerage has recommended a basket of stocks, including Kotak Mahindra Bank, Bajaj Finance, Bharti Airtel, Avenue Supermarts, State Bank of India, Max Healthcare, Navin Fluorine, Kalpataru Projects, LG Electronics India, Nestle India, Eternal, Ujjivan Small Finance Bank, Chalet Hotels, Minda Corporation, and Dalmia Bharat.
In its bear case, the brokerage values the Nifty at 17x, implying a December 2026 target of 23,865, which is still above current levels. Ongoing uncertainty around currency movements, oil prices, and global trade could weigh on export-driven growth in 2026. Concerns over global growth, driven by tariffs and geopolitical tensions, may also compress market multiples in the near term.
Indian equities saw a sharp correction in March 2026, with the Nifty falling over 11% and broader markets underperforming amid a mix of global and domestic headwinds. The sell-off was largely driven by escalating geopolitical tensions in the Middle East, which pushed crude oil prices above $100-110 per barrel, alongside persistent FII outflows and rising global risk aversion.
Geopolitical developments, particularly the ongoing US-Israel-Iran conflict, have disrupted global energy markets and strained critical oil supply routes. For India, which imports around 85-90% of its crude requirement, the spike in oil prices poses a significant macro challenge. Higher crude costs increase input costs for companies and pressure inflation, fiscal balances, and external accounts. Sustained prices above $100 per barrel could widen the current account deficit and weigh on GDP growth, while prolonged uncertainty may dampen global risk appetite and flows into emerging markets like India.
Financial conditions have tightened, with the rupee weakening to around 95 per dollar due to oil-related import pressures and capital outflows. Currency volatility has raised hedging costs and contributed to imported inflation. Meanwhile, global bond yields, particularly in the US, have remained elevated, prompting capital shifts away from emerging markets. The benchmark 10-year Indian government bond yield currently trades in the 6.7-7% range, recently touching a one-year high above 7%, driven by higher crude prices, inflation concerns, and expectations of continued global tightening.Rising oil prices are exerting a three-fold impact: inflation is being pushed higher due to fuel and transportation costs; the current account deficit is widening, with every $10 per barrel increase in oil potentially adding about 0.4-0.5% of GDP; and fiscal pressures are building due to higher subsidies and reduced policy flexibility.
Foreign institutional investors have remained a persistent headwind, with outflows exceeding $19 billion so far in 2026 and over Rs 1.20 lakh crore in March alone. These outflows have been driven by rising US yields, a stronger dollar, geopolitical risks, and the relative appeal of developed markets. While domestic institutional investors have provided some support, the lack of sustained FII inflows continues to weigh on sentiment and limits near-term market recovery.
While the medium-to-long-term outlook for the Indian economy and corporate earnings remains constructive, supported by resilient domestic demand, improving earnings visibility, and ongoing structural reforms, the near term could see heightened volatility, driven by fluctuations in commodity prices, global risk aversion, and foreign fund flows.
In this context, investors are advised to maintain liquidity of around 10-15% to take advantage of market dips in a phased manner and gradually build positions in high-quality companies with strong earnings visibility over a 12-18 month investment horizon, the brokerage added.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)