Base bottomed out; it’s time for rebound

Global brokers see Indian equities reversing their worst underperformance in three decades as policy reforms, macro stability and earnings revival spark a fresh rerating cycle. Indian equities, which have spent much of 2025 lagging behind their emerging-market counterparts, are poised for a decisive rebound next year as global investors rotate out of AI-led North Asian markets and return to domestic-demand stories, according to a series of new assessments led by Morgan Stanley.

In a detailed note, strategists Ridham Desai and Nayant Parekh argue that India’s phase of relative underperformance — its steepest since 1994 — has likely bottomed out.

With valuations now reset, foreign positioning at decade-lows, and policy clarity improving, they estimate a 13 per cent upside for the BSE Sensex by end-2026 under their base-case scenario. In a more optimistic environment, the index could climb towards 107,000, they wrote. The assessment comes after Indian markets struggled to keep pace with a blistering technology and semiconductor rally across Taiwan, South Korea and China — regions that collectively dominate nearly two-thirds of the MSCI Emerging Markets Index. India’s lighter exposure to hardware and pure-play AI stocks meant it largely missed this surge, widening the country’s relative underperformance to its biggest margin since 1993.

Why India lagged in 2025

This year proved unusually difficult for Indian equities. A strong AIdriven rally in North Asia, elevated domestic valuations carried over from previous years, and heavy foreign portfolio outflows created a “relative-return shock,” as described by Jefferies, which called 2025 a “return to mean rebalancing” for India after years of sustained premium.

Despite this, India’s overall market remains one of the world’s largest — with a capitalisation of roughly $5.4 trillion—and continues to attract consistent domestic inflows through mutual funds and systematic investment plans (SIPs). These domestic buffers have helped stabilise the market even as foreign ownership slipped to its lowest levels in years.

A 2026 rebound

Morgan Stanley describes the approaching shift as a “self-help story” likely to accelerate in 2026. The thesis rests on several structural pillars: v Improved policy credibility after continued fiscal consolidation and strong public-capex momentum; v A revival in corporate earnings, supported by robust credit growth, digital formalisation and sustained urban consumption; v Attractive relative valuations, after India’s premium to EM peers contracted sharply through 2024–25; v The potential cooling of the global AI frenzy, which may redirect capital towards economies with more diversified growth drivers. The firm also highlights India’s expanding global weight — now roughly 18–19 per cent of the MSCI EM Index, second only to China — as an anchor for future inflows once global allocation cycles reverse.

Global houses bullish too

Morgan Stanley’s optimism echoes broader sentiment across global financial institutions. Goldman Sachs recently reinstated India as an “overweight” market, projecting steady double-digit gains through 2026 with the Nifty 50 expected near 29,000 by end-period. Other houses note that India’s combination of macro stability, strong domestic demand, and long-term policy continuity make it unique among major emerging economies.

Analysts also warn that India’s path to recovery is sensitive to external and domestic risks. A sharp rise in crude oil prices could strain India’s current account and inflation profile; global recession or financial shocks may compress risk appetite; and any domestic policy slippage — whether fiscal or regulatory — could dampen investor confidence. The persistence of the AI-led rally in North Asia may also prolong India’s relative underperformance if investors remain concentrated in semiconductorheavy markets.

Macro trade vs stock picking

A key theme in the Morgan Stanley note is the shift from India’s stock-specific outperformance of recent years to a macro-driven trade in 2026. As they put it, next year is likely to mark a transition “away from the stock-picking environment of 2025,” with broader index-level participation as earnings and liquidity cycles turn more supportive.