Equity investors must factor in uncertainty as a permanent feature

The financial year 2026 has begun against the backdrop of intensifying global uncertainties. The Trump tariffs have signalled a shift towards a more protectionist global trade environment.

 

While there is a 90-day pause on tariffs for countries willing to negotiate, the trade war with China continues with a 125 per cent tariff, further deepening the economic rift between the US and China. This also means US growth slows down significantly which increases the probability of a recession.

 

Amid the global noise, India may well emerge as a relatively safe harbour and possibly a beneficiary in the long term as global supply chains readjust.

 

India’s goods exports and trade surplus with the US at 2.3 per cent and 1.2 per cent of GDP (gross domestic product) are significantly lower in comparison to most emerging market (EM) counterparts like Vietnam, China, and South Korea.

 

EMs like India, where inflation is not a problem, will resort to monetary stimulus to support domestic growth since the fiscal room is limited.

 

The RBI (Reserve Bank of India), in its latest policy meeting, has reaffirmed its intent to maintain ample liquidity throughout the year and has set us up for another 50bps (basis points) rate cut this year.

 

On the ground, domestic consumption is slowly coming back after a weak showing in FY25 (2024-25). Favourable monsoon forecasts bode well not only for food inflation but also the rural economy.

 

Frothy valuations have come off, with the Nifty price-to-earnings multiple now trading just below 

 

its 10-year average and a recalibration in earnings expectations. Having endured the correction, Indian markets now look better placed to capitalise on the next phase of growth.

 

Despite the global uncertainty, we expect corporate earnings to bounce back in FY26 (2025-26) to low teens on the back of better show from sectors like cement, consumer, utilities, oil and gas, and financial services.

 

The second-order impact of rising US protectionism may also be a reallocation of global capital as the risk premium on US assets increases. As the expectations of a US recession rise, we could witness a gradual shift in capital flows from the US towards other EMs.

 

This could benefit India with its improving valuations, domestic resilience and relatively stable macro conditions which could lead to a reversal in FPI (foreign portfolio investment) positioning.

 

Another collateral benefit of global turmoil is the sharp decline in Brent crude oil prices. Lower crude prices can effectively make up for potential reduction in US trade surplus.

 

As we move forward, equity investors must factor in uncertainty as a permanent feature rather than a passing phase. Trade tensions, electoral cycles, and geopolitical risks may heighten short-term volatility — but smooth seas never made skilled sailors. India’s long-term growth potential remains intact, and we expect 6 per cent GDP growth in FY26.

 

The major risk to our thesis is a potential currency war playing out, especially with China, if the global trade negotiations don’t follow through. While India is in a better position given the limited dependence on trade, a currency competition has the potential to dent its recovery. India being a net importer will also face a depreciation dilemma that many other EMs may not and the recovery may now be slower than expected initially.

 

In this scenario, asset allocation remains the most effective way to weather volatility. For FY26, our outlook suggests equity, fixed income, and gold could deliver returns in a narrow range. Asset allocation funds like “multi asset” and “balanced advantage” are the preferred options to tide over the volatility.

 

Given valuation comfort in largecaps, equity investors should consider allocating towards largecap and flexicap as core funds, with a minimum time horizon of three years. For investors looking at thematic funds we would recommend consumption and BFSI (banking, financial services, and insurance) funds.

 

Given the expectation of more rate cuts, fixed income should also be an integral part of every investor’s asset allocation which will provide stability and regular income.

 

Investors should add duration through short-term and duration funds should continue to do well this year. The path forward will not be without challenges, but India’s fundamentals offer a stable foundation for the patient investor.

 

The writer is chief investment officer, Aditya Birla Sun Life AMC