Key Takeaways
- • Indian equities delivered only 6.5% returns through mid-December 2025, significantly trailing emerging markets (+26%), US equities (+17.5%), and MSCI EMU, with year-on-year performance falling one standard deviation below MSCI World and nearly two standard deviations below MSCI Emerging Markets.
- • Underperformance stemmed from global trade and tariff tensions, domestic economic weakness, and geopolitical risks including Middle East conflicts and India-Pakistan tensions, though macroeconomic conditions have begun improving.
- • Indian GDP is expected to accelerate in 2026 supported by stronger domestic demand, monetary easing, and ongoing structural reforms, with inflation near a 50-year low enabling continued RBI accommodation.
- • Early signs of earnings recovery are emerging as growth-supportive measures take effect, including income tax relief, GST rationalization, and the Reserve Bank's recent 25-basis-point rate cut to 5.25%.
- • Portfolio fundamentals across holdings show improved operating margins, robust return on equity, and low leverage levels, positioning Indian equities favorably for recovery as external headwinds moderate.
Summary
Indian equities have faced substantial headwinds throughout 2025, with returns of just 6.5% through mid-December representing significant underperformance relative to global benchmarks. According to Generali Investments analysts Vladimir Oleinikov and Guillaume Tresca, this weakness is particularly pronounced when measured against emerging markets, which advanced 26%, and US equities, which gained 17.5%. On a year-on-year basis, Indian equity performance has deteriorated to nearly two standard deviations below the MSCI Emerging Markets index and one standard deviation below the MSCI World, illustrating the severity of the underperformance relative to historical patterns.
The disappointing returns reflect multiple concurrent pressures. Global trade and tariff tensions, particularly elevated US tariffs affecting exporters, have weighed on sentiment. Domestically, economic momentum softened during parts of 2025, while geopolitical uncertainty intensified from Middle East conflicts and regional tensions between India and Pakistan. These cross-currents created a challenging environment for risk appetite toward Indian equities despite structural strengths in the economy.
However, the fundamental backdrop has begun to shift materially. Indian GDP has surprised to the upside in recent data, with expectations for acceleration in 2026 underpinned by stronger domestic demand and an accommodative monetary policy environment. Inflation has declined to near 50-year lows, providing the Reserve Bank of India considerable scope to maintain an easing stance even as the rate-cutting cycle approaches completion. The central bank's recent 25-basis-point reduction to 5.25% reflects this supportive posture and should continue supporting growth into 2026.
Critically, the first indications of an earnings recovery are emerging. Growth-supportive fiscal measures—including income tax relief and GST rationalization—are beginning to translate into improved corporate profitability. Across holdings tracked by Generali Investments, aggregate operating margins have expanded, return on equity metrics remain robust, and leverage remains at low levels, positioning the market for potential margin expansion as top-line growth accelerates. Foreign investor positioning has also turned supportive, suggesting institutional capital is positioning for the anticipated recovery.
The convergence of improving macroeconomic fundamentals, accommodative monetary policy, emerging earnings recovery, and supportive foreign positioning suggests the outlook for Indian equities has shifted meaningfully from the challenging backdrop that characterized 2025. While external risks persist, the domestic economic and market structure appears increasingly positioned to deliver positive returns once global tariff and geopolitical concerns moderate.
The disappointing returns reflect multiple concurrent pressures. Global trade and tariff tensions, particularly elevated US tariffs affecting exporters, have weighed on sentiment. Domestically, economic momentum softened during parts of 2025, while geopolitical uncertainty intensified from Middle East conflicts and regional tensions between India and Pakistan. These cross-currents created a challenging environment for risk appetite toward Indian equities despite structural strengths in the economy.
However, the fundamental backdrop has begun to shift materially. Indian GDP has surprised to the upside in recent data, with expectations for acceleration in 2026 underpinned by stronger domestic demand and an accommodative monetary policy environment. Inflation has declined to near 50-year lows, providing the Reserve Bank of India considerable scope to maintain an easing stance even as the rate-cutting cycle approaches completion. The central bank's recent 25-basis-point reduction to 5.25% reflects this supportive posture and should continue supporting growth into 2026.
Critically, the first indications of an earnings recovery are emerging. Growth-supportive fiscal measures—including income tax relief and GST rationalization—are beginning to translate into improved corporate profitability. Across holdings tracked by Generali Investments, aggregate operating margins have expanded, return on equity metrics remain robust, and leverage remains at low levels, positioning the market for potential margin expansion as top-line growth accelerates. Foreign investor positioning has also turned supportive, suggesting institutional capital is positioning for the anticipated recovery.
The convergence of improving macroeconomic fundamentals, accommodative monetary policy, emerging earnings recovery, and supportive foreign positioning suggests the outlook for Indian equities has shifted meaningfully from the challenging backdrop that characterized 2025. While external risks persist, the domestic economic and market structure appears increasingly positioned to deliver positive returns once global tariff and geopolitical concerns moderate.
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