After A Weak 2025, Indian Markets Could Turn FII-Friendly In 2026: HSBC

With foreign investors staying cautious through much of 2025, a return of foreign institutional investors (FIIs) to Indian equities could be on the cards in 2026, supported by stronger earnings growth in FY27 and the possibility of a trade agreement with the United States, according to a report by HSBC Mutual Fund.

The fund house struck an optimistic note on India’s equity outlook for 2026, even as market performance this year has remained uneven across segments. It said valuations, earnings visibility and sector-specific tailwinds could set the stage for renewed global interest in Indian stocks, reported IANS.

Why FIIs Could Look Back at India

The report highlighted that while FIIs have largely stayed on the sidelines in recent months, the medium-term picture is improving. A potential US-India trade deal is seen as a key catalyst, alongside expectations of healthier earnings growth in FY27.

HSBC Mutual Fund pointed out that the Nifty is currently trading at 20.5 times its one-year forward price-to-earnings (PE) ratio, which is broadly in line with its five-year average and only slightly above its ten-year average. This, the fund house said, suggests valuations are no longer stretched and could support incremental inflows once earnings momentum improves.

Banks and NBFCs in the Spotlight

Among sectors, HSBC Mutual Fund said it remains overweight on banks and non-banking financial companies (NBFCs). The fund house expects net interest margins for banks to improve in FY27, aided by a more favourable interest rate environment.

Private sector banks, in particular, are expected to see a recovery in asset quality after a sluggish FY26. This improvement is likely to translate into mid-teens earnings growth in FY27, the report said.

NBFCs, meanwhile, are already delivering strong earnings growth. HSBC noted that robust credit demand, combined with improving margins following a decline in interest rates, continues to support the sector’s performance.

Consumer Discretionary Gets a Thumbs-Up

The report is also overweight on the consumer discretionary space, reflecting changing consumption patterns and recent policy support. Internet platforms are expected to continue benefiting from the rapid shift towards quick commerce and e-commerce.

Segments such as jewellery, automobiles and travel-related businesses could also gain traction, helped by recent government measures aimed at boosting disposable incomes. HSBC Mutual Fund said these trends may provide steady demand support even if global conditions remain volatile.

Manufacturing and Technology Themes

Electronic manufacturing services (EMS) was flagged as a long-term structural theme. The report cited the government’s strong focus on building a domestic electronics manufacturing value chain as a key driver for the sector’s growth.

On information technology, HSBC Mutual Fund maintained a neutral stance. While near-term challenges persist, the fund house said FY27 IT earnings could approach double-digit growth, supported by increasing adoption of generative artificial intelligence.

The fund is also neutral on industrials, indicating a balanced risk-reward outlook at current levels.

HSBC Mutual Fund said it remains underweight on metals. According to the report, much of the upside in aluminium and steel prices is already reflected in valuations, limiting further near-term gains.

A Year of Divergence in 2025

The report underlined the divergence in equity market performance in 2025. While the Nifty Total Return Index (TRI) was up 12 per cent till November, NSE midcap stocks gained 6.5 per cent. In contrast, the BSE Smallcap index declined 5 per cent during the same period.

HSBC Mutual Fund acknowledged that earnings growth for the Nifty has been weak this year and equity market returns have been modest. However, it pointed to several positives on the macroeconomic front that could support a stronger market performance in 2026.

Despite the mixed showing in 2025, the fund house said it remains constructive on Indian equities for 2026. Improving earnings visibility, stable valuations and the prospect of renewed FII interest could together shape a more favourable environment for investors in the year ahead, the report concluded.