Booming Indian economy & implications for investing in equity markets with recommendations

 

Hey friends , History has a uncanny style of repeating itself 😍

 

Just 3 months ago , I wrote in my blog in August end , that my estimates about robust Indian GDP growth of 8% in FY26( which I predicted in my blogs early this year in March & Apri )  , turned out to be correct , unlike some incorrect narratives & estimations about GDP slowing  down to  6.5 % this year  by IMF/ world bank & our own RBI towing the line 🙏

The same history / story repeated again few days back , when last quarter( Q2 of FY26) , came out at 8.2 % (while the same big institutions as well as big investment banks/brokerages predicting slower GDP growth at about 6.5%) , despite US punishing tariffs in August .  Next quarters are going to be even better with GST reforms effect & potential  US trade deal closure.

You can take a look at my earlier blogs in March & April in my blog website link , where I have talked about this incorrect narratives ..

https://indiavalueinvesting.blogspot.com

 

I had been crying  like a lone wolf that all these arm chair economists of world bank/IMF & sadly our own  RBI  have been spreading incorrect narratives on Indian economy slowdown & consequently potential corporate earnings slowdown & potential over- valuation .This obviously led to crazy FIIs outflow since last year with adverse impacted on market/ index levels( They pulled out >2 lac crore since Sep last year).

Consequently , India markets(Nifty & Sensex) have not been the one of the top performers among International markets (US Nasdaq , US  S& P , Japan & Taiwan doing better), though we are the fastest growing big economy 🙏 . See the table below on YTD returns% for big Indexes

 

Top 25 Global Equity Indexes: 1-Year Return %

Rank	Index	Country/Region	1-Year Return	Trend Context (Nov '24 - Nov '25)
1	Nasdaq 100	🇺🇸 USA	+24.6%	Unabated momentum in AI & Semiconductors.
2	S&P 500	🇺🇸 USA	+18.4%	Broad-based rally; financials joined tech.
3	Nikkei 225	🇯🇵 Japan	+16.8%	Weak Yen in late '24 boosted exporters.
4	TAIEX	🇹🇼 Taiwan	+15.5%	TSMC led the charge on chip demand.
5	Nifty 50	🇮🇳 India	+14.8%	Pre-budget rally (early '25) + steady earnings.
6	BSE Sensex	🇮🇳 India	+14.2%	Mirroring Nifty; large caps outperformed midcaps.
7	Euro Stoxx 50	🇪🇺 Eurozone	+12.0%	Strong performance by ASML, SAP, and LVMH. Rate cuts
8	DAX	🇩🇪 Germany	+11.2%	Recovery from 2024 industrial lows. Rate cuts
9	CAC 40	🇫🇷 France	+9.5%	Luxury sector rebound in Q1 2025.
10	IBEX 35	🇪🇸 Spain	+8.5%	Banking sector benefitting from rates margin.
11	KOSPI	🇰🇷 South Korea	+8.1%	Samsung/Hynix cyclicals improving.
12	FTSE 100	🇬🇧 UK	+7.9%	Defense, Energy, and Pharma defensives.
13	SMI	🇨🇭 Switzerland	+7.2%	Safe-haven inflows amidst global volatility.
14	VN-Index	🇻🇳 Vietnam	+6.9%	Export growth acceleration.
15	TSX Composite	🇨🇦 Canada	+6.5%	Stabilized oil prices supported energy heavyweights.

 

🇮🇳 Global and Indian Equity Market Outlook: A Tale of Two Timelines

The global equity landscape presents a complex yet fascinating picture, balancing moderating inflation and interest rate cycles in developed markets against the robust, domestically-driven growth of emerging economies, especially India. Understanding the interplay between macroeconomic fundamentals and market dynamics is key to navigating the next 12 months (short-term) and the 1-3 year horizon (medium-term).

 

Big Picture: Growth Is Slower Globally, but India Still Stands Out

The latest IMF World Economic Outlook (Oct 2025) projects:

• Global GDP growth around 3.2% in 2025 and 3.1% in 2026, with advanced economies at ~1.5% and EMs just above 4%. 
• US growth revised up to about 2.0% in 2025 and 2.1% in 2026, helped by an AI-investment boom offsetting tariff headwinds. 
• Euro area expected to grow about 1.3% in 2025 and 1.2% in 2026, according to the European Commission.
• China projected at 4.8% GDP growth in 2025; still solid, but a far cry from its double-digit years. 
• India remains the standout: IMF, Moody’s and Deloitte all cluster around 6.5–6.9% annual growth over the next couple of years, making it one of the fastest-growing major economies globally. India grew at much higher 7.8% & 8.2% in last 2 quarters(Q1 and Q2 of FY26)

 

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🌎 Global Economy & Equity Outlook

The dominant narrative globally is the shift from high inflation and restrictive monetary policy toward a "soft landing" scenario.

Short-Term (Next 12 Months: 2026)

• Moderating Global Growth: Global growth and inflation are expected to moderate, though uncertainty remains elevated due to geopolitical risks and ongoing trade policy shifts.
• The US Focus: The US economy is expected to see slower but still positive growth, supported by resilient consumer balance sheets and robust AI-driven capital expenditure (CapEx). The Federal Reserve (Fed) is anticipated to pause cutting interest rates, likely front-loaded in the first half of the year.
• Projected Returns (US): Most short-term forecasts are bullish, anticipating positive returns in the range of 6-8% for 2026, driven primarily by earnings growth and the rate-cut cycle. The biggest risk is big time investments into AI (>500 Bil in 2025 itself) and projected optimistic Returns on AI related investments by big IT companies which is driving the current US equity rally . Is it a bubble or the returns/ profits will back this super optimism?  That time will only say as this is the single biggest risk.  The "Magnificent Seven" (Google, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) have driven a majority of the S&P 500's gains in recent years. This creates a scenario where if these stocks perform well, the index looks healthy, even if the other 493 companies are struggling
• Europe and China: Europe's outlook is supported by shareholder distributions and fiscal spending plans. China is expected to meet its growth target of around 4-5% for 2026, relying on continued policy support.
• Projected Returns (Europe): Similar to the US, a positive, but moderate return in the range of 5-7% is often projected, supported by easing inflation & monetary easing(European Central  bank cutting rates)
• Projected Returns (China): Volatility and policy uncertainty are high. Returns could be range-bound in the short term, possibly 3-5%, with significant dispersion.

Medium-Term (1-3 Years: 2027-2028)

• Structural Shifts: The medium-term outlook is shaped by structural forces like Artificial Intelligence (AI) investment &  ROI on these AI investments( single biggest risk), geopolitical fragmentation, and shifting global supply chains.
• Developed Markets (US & Europe): Growth is expected to converge towards potential, with AI-related investments likely driving CapEx. Ten-year forecasts from major institutions suggest annualized total returns for:
• Projected Returns (US): Around 6-7% annually (primarily driven by EPS growth). Major risk is around ROI in heavy AI related investments by Big tech(Magnificent Seven companies)
• Projected Returns (Europe): Around 7% annually (balanced between earnings and shareholder yield).
• Emerging Markets: Emerging Markets, including India, are positioned for stronger returns due to higher expected Earnings Per Share (EPS) growth.
• Projected Returns (Emerging Markets ex-Japan): Forecasts point to total annualized returns of over 10% for the next decade, with India being a key driver.

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🇮🇳 India: The Outperformance Story

India's equity market is increasingly being viewed through a structural lens, where strong domestic fundamentals are expected to decouple its performance from global headwinds over the long term.

I have always been bullish on Indian economic prospects and hence market returns( which has down a strong co-relation with GDP growth in India in long term). In my blogs in early2025(March/ April) when Nifty was at 22000(due to intense volatility), I had projected steady medium term rise to 28000 by FY26 end and today Nifty 50 is at 26000(despite short term volatility due to Trump’s tariff mania , Geopolitical reasons , massive FII outflows because of incorrect GDP slow down narrative . In last month blog (Abhi to party shuru hui Hai), I talked about this medium & long term optimism about Indian markets cause of structural India growth and demand story , strong macros , favourable govt & RBI policy & demographic dividends. This equity market outlook will now become better wit the latest GDP numbers at 8.2% , much higher than predicted (6.5%).

📈 Economic Backdrop: GDP & Consumption

India remains the fastest-growing major economy, with recent GDP data proving resilient.

• GDP Growth: Q2 FY26 growth was at 8.2%, driven mainly by manufacturing , robust services growth(including Financial services) and private consumption. With GST reforms and potential US deal coming , My estimates are that we will easily grow at 8 to 8.5%  in FY26 and 8% in FY27. We have become the 4^th biggest GDP after beating Japan this year & will soon become the 3^rd biggest after beating Germany in 2027(which is in almost recession)
• GDP-Equity Correlation: A unique feature of the Indian market is the strong, reliable correlation between real GDP growth& market  equity returns (in USD terms) over decades. This suggests that the economic expansion is effectively translating into corporate profits and stock market performance.
• Consumption & Capex Revival: Policy measures like GST rationalization and income tax relief are poised to boost domestic consumption significantly. Private Capital Expenditure (CapEx) is projected to become a stronger contributor to growth from 2027 onwards.

Short-Term Outlook (Next 12 Months)

• Near-term Volatility: The market may remain somewhat range-bound in the immediate short-term due to slightly higher valuations on an absolute basis(Nifty 50 at 22.7 versus 22.3 of  last 5 years average) and lingering global uncertainties (e.g., US tariffs/trade policy, wars ).
• Earnings Pick-up: An improvement in macro indicators , policy & taxation reforms (GST and Income Tax rationalization etc)and a strengthening earnings trajectory could set the stage for a stronger rally from the second half of 2026 onward. MSCI India consensus EPS growth estimates for the 2025/26 calendar year are around 13%. Consensus EPS growth for India in 2026 is broadly in the mid-teens (~14–16%)
• Projected Returns (India): Given the robust but consolidating phase, short-term returns are projected to be positive but potentially moderate, likely in the 10-12% range.

-        Goldman’s Nifty target of 29,000 by end-2026 implies ~12% upside from recent levels. 

-        HSBC’s Sensex target of 94,000 by end-2026 implies ~10–11% upside. 

-        Morgan Stanley’s call is at 95000 by 2006 end (12% upside  from current levels)  

-        My estimates are much more optimistic (based on strong macros , structural growth story and earnings growth picking up & FIIs returning back in Oct/ Nov after over-selling in last few quarters) at 15-20% growth with Nifty 50 at 31000 to 32000 levels by end-2026 (from 26000 level now)

 

Medium-Term Outlook (1-3 Years)

• Structural Bull Run: The medium term is highly constructive. Supported by an expanding domestic market, strong macro fundamentals, continued structural reforms (like 'Make in India' , GST and Income Tax rationalization, PLI incentives ), and rising investor inflows from Domestic Institutional Investors (DIIs), India is set for a structural bull market. MSCI India consensus EPS growth estimates for the 2026/27 calendar year are higher, at around $16\%$.
• Projected Returns (India): Over the 1-3 year horizon, India is expected to deliver premium returns. Annualized returns are projected to be in the 12-18% range, making it a key outperformer among major global markets. My estimates are more bullish at 15-18% growth

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🎯 Attractive Sectors in India (Projected Returns Perspective)

The best-performing sectors will be those that align with India's domestic growth drivers: Consumption, Infrastructure, and Policy-driven manufacturing. Apart from these sectors , dont forget to invest 10-20% of your portfolio into Gold ETF as Gold has become a mandatory & strategic diverifier (apart from being a safe haven) & has done better than equity in last 5 to 10 years(17-19% returns versus 13-15% returns of equity/ Nifty 50)

Sector	Rationale for Growth (Medium-Term)	Key Drivers
Consumer Discretionary/Automobiles	Direct beneficiary of rising disposable income, GST rationalization (lowering prices), and pent-up demand.	Festive seasons, tax relief, credit policy easing for auto loans.
Infrastructure & Capital Goods	Supported by the government's sustained focus on CapEx and the eventual revival of private CapEx (from 2027).	Government's National Infrastructure Pipeline, urban development, manufacturing supply chain shifts. PLI incentives
Banking and Financial Services (BFSI)	Expected to remain strong due to steady credit growth, improved liquidity transmission, and the overall financial health of the economy.	Steady credit growth, low inflation supporting margins, formalization of the economy. Monetary easing by RBI
Renewable Energy	Driven by aggressive national targets (e.g., 500 GW of renewable energy capacity by 2030) and supportive government policies.	Solar, wind, Green Hydrogen  and bioenergy capacity expansion; falling technology costs.
Healthcare & Pharmaceuticals	Increasing healthcare demand from an aging population, rising disposable income, and government initiatives like Ayushman Bharat.	Higher health insurance penetration, focus on domestic manufacturing (APIs).
Defence & Electronics Manufacturing	Policy-driven growth from the focus on Self-Reliance (Aatmanirbhar Bharat). Defence production is targeted to triple by 2029. Electronics(including Smart phones) have become one of the largest exports driver recently	Import substitution, technology-led manufacturing schemes (PLI).

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Final Takeaway

The next 12 months for global equities will be a transitional phase, defined by the pace of rate cuts, Geopolitical issues , US-India trade deal closure , returns on big AI investments & the outcome of the US 'soft landing.' However, the medium-term outlook is distinctly skewed in favor of India. Its robust & resilient GDP-led earnings growth, powerful domestic consumption engine, and aggressive structural reforms position it as a key market for outperformance. This Indian equity market outlook will now become better wit the latest GDP numbers at 8.2% , much higher than predicted (6.5%).

Happy investing

Amardeep