FIIs Likely to Return to India in 2026; Banks and Consumer Discretionary Seen as Top Performers

New Delhi: Foreign institutional investors (FIIs) are expected to return to Indian equity markets in 2026, supported by stronger earnings growth in FY27 and the possibility of a trade agreement with the United States, according to a report released on Wednesday.

The report by HSBC Mutual Fund said it remains optimistic about equity markets in 2026, noting that Nifty valuations at 20.5 times one-year forward price-to-earnings (PE) are broadly in line with the five-year average and at a modest premium to the 10-year average.

The fund house said it is overweight on banks and non-banking financial companies (NBFCs). It expects bank net interest margins to improve in FY27, while asset quality at private banks is likely to recover, driving mid-teens earnings growth after a relatively slow FY26. NBFCs, meanwhile, continue to post strong earnings growth, supported by robust credit demand and improving margins due to easing interest rates.

HSBC Mutual Fund is also overweight on the consumer discretionary sector. It highlighted that internet-based platforms are benefiting from a strong shift in consumer behaviour towards quick commerce and e-commerce. Other segments such as jewellery, automobiles and travel-related businesses are also expected to gain from recent government measures aimed at increasing disposable incomes.

Electronic manufacturing services remains a key structural theme, driven by the government’s focus on building a comprehensive electronics manufacturing value chain in India. The fund house, however, remains neutral on information technology and industrials, noting that FY27 IT earnings could approach double-digit growth, aided by the adoption of generative artificial intelligence.

The report said HSBC continues to stay underweight on metals, as it believes most of the upside in aluminium and steel prices is already reflected in current valuations.

Highlighting market performance trends, the report noted a divergence in 2025 so far, with the Nifty Total Return Index (TRI) up 12 per cent till November, NSE mid-cap stocks gaining 6.5 per cent, while the BSE Smallcap index declined 5 per cent.

“While 2025 has seen muted earnings growth for the Nifty and subdued equity market performance, several positive developments on the economic front could support stronger market outcomes in 2026,” the report added.

With inputs from IANS