R. Janakiraman, CIO – Franklin Equity
Global equity markets started the year on a strong footing, with most major indices delivering healthy gains despite a robust rally in 2025. Against this backdrop, India has continued to underperform several global peers in early 2026, reflecting a mix of external headwinds and domestic sector-specific dynamics.
The US-Iran conflict is a key swing factor for near-term market direction. Developments remain fluid and visibility is limited in the fog of war. However, our base case remains that the conflict should be contained with temporary disruptions and oil price spikes.
The most immediate transmission channel is through energy markets. Brent had already begun pricing a risk premium, moving from the mid-USD 60s at the start of February 2026 to about USD 85 and now above USD 100 per barrel.
While volatility is expected, the scale of the shock may still be more contained than in 2022 at that time, more than 4 million barrels per day of Russian supply was at risk, whereas Iran contributes roughly 1.5 million barrels per day in terms of exports to global markets. However, this depends on the Straits of Hormuz being open for supplies from other countries in the region.
India could also see temporarily higher freight and insurance costs, which could weigh on exports and create short-term pressures on growth, the balance of payments and the currency.
Financial market reactions could see a risk-off phase, pressure on emerging-market currencies including the INR, and a pivot toward safe-haven assets. FPI flows may remain cautious in the near term, though incremental downside is limited given the already muted foreign flows over the past year.
Despite these external risks, India's domestic macro environment continues to show signs of broad-based improvement. The policy mix of income-tax reductions, GST rate cuts and monetary easing through 2025 is now feeding into the data, with high-frequency indicators reflecting strengthening demand.
Bank credit growth has firmed to around 14% YoY, driven by sustained momentum across corporate and retail lending. Industrial activity remains resilient, and GST collections have grown ~8% YoY - despite rate rationalisation - indicating a healthier underlying consumption trend.
Corporate earnings in FY26 are expected to close relatively soft primarily due to a restrictive rate environment in the early part of the year, which constrained bankingsector margins and kept credit demand subdued. With banks accounting for about a quarter of the large cap index, their muted ~2% earnings growth dragged overall market performance. This sets a favourable base for FY27, where banking earnings are projected to rebound meaningfully.
Cyclicals continue to demonstrate strong momentum. Sectors such as oil & gas, capital goods, and automobiles remain on healthy footing heading into FY27. IT services, however, are likely to stay in a low-growth zone, as global commentary increasingly highlights AI-driven automation and efficiency-led deal structures that may weigh on traditional revenue models.
In aggregate, Nifty earnings are expected to rise from ~8% in FY26 to around ~15% in both FY27 and FY28. At 20.5x one-year forward P/E (as of February 2026), valuations reflect partial pricing of earnings recovery expectations. Valuation levels remain subject to change based on earnings outcomes and global developments.
India's structural positioning supported by strengthening domestic demand, a more disciplined fiscal framework, and a robust credit cycle may help cushion the impact of near-term geopolitical volatility while maintaining a constructive medium-term growth outlook.
Opportunities for Investors
While geopolitical developments are driving near-term volatility, our investment approach remains unchanged. We continue to invest using a fundamental, bottom-up process, focused on identifying companies trading at a discount to our assessment of sustainable earnings power and intrinsic value. In periods of macro uncertainty, markets often price assets based on short-term headlines rather than long-term fundamentals.
Mutual fund categories such as equity, hybrid funds schemes have different investment mandates and risk-return characteristics. In the current volatile environment, long term equity investors may stay invested in broad diversified categories like flexi cap, multi cap and multi factor equity funds. Hybrid categories like multi asset allocation or balanced advantage funds may also provide a balance risk across asset classes. Investors may evaluate these categories based on their individual financial goals, risk tolerance and investment horizon, and are advised to consult their financial advisor before making any investment decision.
Maintaining a long-term approach, staying disciplined across market cycles, and aligning investments with individual financial goals are generally considered important factors in achieving long-term financial outcomes.
Source: Bloomberg, RBI, NSE, Ministry of Statistics and Program Implementation (MOSPI), Morgan Stanley
The sector/stocks/securities mentioned in the material may not be considered as investment advice or recommendation to buy or sell nor a view or opinion on quality or profitability providing a basis of investment decision in the same. The sector/security mentioned herein are for general assesment purpose only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The sector/stocks may or may not be part of our portfolio/strategy/ schemes. Investors should consult their financial adviser to assess sector suitability based on their individual risk profile. Please consult a registered financial adviser before making investment decisions.Statements/ opinions/ recommendations in this document, which contain words, or phrases such as "will", "expect", "should", "believe" and similar expressions or variations of such expressions, are "forward looking statements". Actual results may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on our services and / or investments. The schemes managed by Franklin Templeton Asset Management (India) Pvt. Ltd (the AMC) may or may not have any future exposure in the same. The reader should not assume that investment in the sector/stocks/securities mentioned was or will be profitable.