Jan 19, 2026
• Global growth is expected to slow further in 2026, led by a deceleration in the U.S. economy.
• Economic activity in India should improve driving earnings towards double digits in FY27.
• Valuations have eased across most segments, though pockets of overvaluation persist
• Indian equity returns may remain muted but more broad-based in 2026, with key risks stemming from geopolitical developments and a potential AI trade reversal.
Calm at the Surface
Viewed in hindsight, global markets had an excellent year in 2025, but this belies the significant volatility and structural shifts that defined the year. U.S. trade policy under the Trump administration marked a decisive turn toward economic nationalism. Markets initially reacted negatively to the “Liberation Day” announcements, but gradually discounted policy rhetoric, embracing the so-called TACO (“Trump Always Chickens Out”) trade. Even the longest U.S. government shutdown failed to meaningfully unsettle markets.
Despite these disruptions, global equities ended the year with gains of over 20%, while global bonds delivered moderate returns. The standout performers amid the turbulence, however, were safe-haven assets, gold and silver, posting returns of nearly 65% and 150%, respectively.
Source: Bloomberg, Sanctum Wealth
Above returns are price returns in local currency terms
India underperformed global peers as concerns around valuations, subdued earnings growth, and rupee depreciation weighed on investor sentiment. Even so, Indian equities managed to close the year in positive territory for a record tenth consecutive year. Beneath the headline performance, however, the broader market experienced significant volatility, with small-cap stocks ending the year in the red and many stocks trading more than 20% below their 52-week highs. This divergence mirrored the broader slowdown in economic activity through much of 2025, particularly in the first half. In response, policymakers implemented supportive fiscal and monetary measures, the benefits of which began to emerge in the latter part of the year, setting the stage for a gradual recovery in 2026.
Global Macro Update
The prevailing consensus points to sub-trend global growth but stops short of a recession. The U.S. economy is expected to be the primary drag, as the full impact of tariffs and the resumption of student loan repayments weigh on consumption, a key engine of growth. While AI-related capital expenditure should continue to support activity, concerns around the sustainability and returns on this investment are mounting.
The U.S. labour market has weakened materially, with non-farm payroll growth slowing to 50,000 in December 2025 and the three-month moving average negative by 22,330. Job openings have declined sharply, hiring momentum has softened, and layoffs are gradually rising. For now, tighter labour supply, partly due to restrictions on immigration, has kept unemployment rate from spiking. However, if job creation continues to slow, unemployment could rise meaningfully in the coming months.
U.S. job gains negative on 3-month average basis
Source: Bloomberg, Sanctum Wealth
The U.S. economy continues to exhibit K-shaped dynamics, with the top 20% of income earners continuing to spend while the bottom half faces mounting financial strain. This divergence is being exacerbated by the resumption of federally managed student loan repayments, which affect nearly 45 million borrowers, most of them from the lower-income group, with sizable outstanding balances. Delinquencies have already risen to 14.4% in Q3 CY25 and are expected to climb further. While higher-income households may sustain consumption, broader consumer spending is likely to moderate meaningfully.
Student loan delinquencies have risen sharply
Source: Bloomberg, Sanctum Wealth
In Europe, Germany, the region’s largest economy, is expected to grow 1–2% following couple of years of contraction, supported by rising defence spending. France and the U.K. face political and fiscal headwinds but are still likely to post growth of 1–1.5%. Structural challenges persist, however, as Europe remains less competitive not only in AI but also in manufacturing, and services. Overall, like the U.S., Europe is poised for modest expansion rather than a recession. Unlike the U.S., however, European labour markets remain resilient, and real purchasing power continues to strengthen.
China also continues to grapple with structural challenges, including weak consumption and deflationary pressures following the property bubble collapse. In the near term, however, strong export performance and technological innovation are providing support and Chinese GDP could grow in the 4.5 to 5% range. The government is pursuing targeted, measured interventions rather than broad-based stimulus, suggesting that recovery is likely to be gradual, but potentially more sustainable once achieved.
Global inflation is moderating amid weak demand. In the U.S., tariffs created some upward pressure on prices, but inflation is expected to remain below 3%. Oil prices, a key driver of inflation, have fallen sharply due to oversupply and weaker demand. This is further supported by U.S. actions in Venezuela. Other commodities remain largely stable, despite recent spikes in a few metals. While rising commodity prices could reignite inflation, this is not the base-case scenario for 2026 yet.
Some metal prices have started rising
Source: Bloomberg, Sanctum Wealth
The benign inflation backdrop gives central banks room to ease policy. The ECB has already cut rates sharply in 2025 and may have further scope, while the Fed has remained cautious due to inflation concerns amid U.S. tariff policy. With the current Fed chair set to be replaced in May 2026, future policy will hinge on the priorities of the new appointee. President Trump has outlined his expectations for the incoming Fed chair, and it remains to be seen to what extent the new chair will comply.
We also cannot overlook recent U.S. actions in Venezuela, which signal that virtually no policy option is off the table for the current administration. While the immediate market impact may be limited, this assertive posture heightens geopolitical risk, especially as rhetoric around strategic territories like Greenland gains traction and tensions with other powers rise. The evolving geopolitical landscape, marked by unilateral moves and greater uncertainty over global norms, will be perhaps the most important risk to watch in the year ahead.
Global Market Outlook
After years of lagging, the S&P 500 ex of Mag-7 outperformed most Mag-7 companies in 2025, a trend that is likely to continue in 2026 as the earnings gap between Mag-7 and rest narrows. Additionally, the Mag-7 companies plan to spend over USD 1 trillion on AI over the next two years and are already using 60% of their operating cash flow towards capex annually. Despite growing AI adoption, returns from these AI investments remains uncertain, and valuations of these companies is elevated. The broader S&P 500 is also not cheap but slightly more reasonable, with a median PE of 18.8x versus a 25-year average of 16.3x. A reversal in the AI trade remains the key risk for U.S. equities this year.
Earnings gap between Mag-7 and rest declining
Source: FactSet, S&P, JPM Asset Management
This risk could have contagion impact on global equities, especially China. In China, the technology sector drove much of the 2025 equity rally. However, Chinese tech stock valuations are more reasonable than their U.S. peers, AI spending is more measured, and adoption is widespread, suggesting Chinese tech could outperform relative to their U.S. peers. Overall, Chinese equities trade around 12x, close to their 20-year average and cheap relative to the rest of the world. As structural reforms support gradual economic recovery, Chinese equities could offer decent long-term returns, though near-term moves may be more muted.
Japanese equities underperformed Europe and China but outperformed U.S. equities. The economy is emerging from a prolonged slowdown and deflation, and improvements in corporate governance, coupled with a pro-growth government, could support Japanese equities going forward as well.
Overall, global equity returns are likely to be more muted in 2026, with a potential reversal in the AI trade and escalating geopolitical tensions as key risks.
India Macro Update
The RBI Governor characterised the Indian economy as being in a “Goldilocks phase,” marked by strong growth and contained inflation. While growth did improve in the second half of 2025 and inflation remained low, it may be premature to describe the current environment as truly Goldilocks.
Although real GDP growth in H1FY26 was strong, nominal GDP growth was weak. Government tax revenues and corporate earnings are more closely linked to nominal GDP growth than real GDP growth. Key high-frequency indicators, including GST collections, tax revenues, private capex, and industrial production, also remained muted. Growth is likely to strengthen in 2026, even as inflation edges higher but remains contained.
Following a relatively weak October, partly due to GST recalibration, high-frequency indicators in November 2025 pointed to a pickup in consumption. E-way bill generation, automobile production, commercial vehicle registrations, non-food bank credit growth, and industrial output all strengthened, with IIP rising to 6.7% year-on-year.
IIP suggest improvement in economic activity in November 2025
Source: FactSet, S&P, JPM Asset Management
Inflation edged up to 1.3% year-on-year in December 2025 from October’s record low of 0.25%. Food prices continued to contract, albeit at a slower pace, falling 2.7% compared with a 5% decline in October. From such unusually low levels, inflation is likely to rise as food prices normalise but should remain manageable. Core inflation is expected to stay benign amid slowing global growth and stable commodity prices, leaving inflation unlikely to be a concern for the RBI. In fact, the RBI would welcome a modest rise in inflation to support nominal GDP growth.
India’s inflation muted as food prices drop
Source: Bloomberg, Sanctum Wealth
The RBI’s December 2025 rate cut surprised markets, which had expected the central bank to pause and assess the transmission of earlier easing. The additional 25 bps cut likely reflected concerns slower nominal GDP growth and slower rate cut transmission. To reinforce policy effectiveness, the RBI committed substantial liquidity support, announcing INR 1 lakh crore of OMOs in December and an additional INR 2 lakh crore in late December and early January 2026. The central bank now appears set to pause and monitor the transmission of its 125bps cumulative rate cuts done in 2025.
On the fiscal front, the government has already announced personal income tax cuts, GST rate reductions, and pay hikes under the 8th Pay Commission, leaving limited room for further stimulus in the upcoming budget. Fiscal consolidation is expected to continue gradually, with the fiscal deficit targeted at 4.2% of GDP in FY27. Overall, fiscal policy remains supportive but further actions in the upcoming budget seem unlikely.
With both monetary and fiscal policy accommodative, consumption is likely to strengthen in 2026 while inflation stays under control. While India may not yet be in a full-fledged Goldilocks phase, it is likely to be closer to it in 2026.
Indian Market Update
Indian equities concluded another year of positive returns in 2025, marking the tenth consecutive year of positive returns, its longest streak. The Nifty also touched fresh all-time highs during the year and ended up with 10.5% returns during the year. Midcaps underperformed large cap with only 6% returns while small-cap declined 6% in 2025. PSU banks, metals, automobile and private banks led gains, while public sector enterprise, IT and Pharma underperformed.
Source: Bloomberg, Sanctum Wealth
Above returns are only price change and not total returns
While the benchmark did relative okay, they mask the broader market weakness. Median Nifty 500 stock is down more than 15% from their 52-week high. Three fourth of companies are down more than 10% from their 52-week high and nearly half are down 20% or more. This is reason why most active funds have underperformed benchmark and the pain
Pain in broader market has been more than index drawdown
Source: Bloomberg, Sanctum Wealth
Equity Outlook
After six consecutive quarters of single-digit year-on-year earnings growth, the Nifty 50 index’s PAT is expected to return to double-digit growth in the second half of FY26. This earnings recovery is likely to extend into FY27, with early double-digit growth driven more by operating leverage and margin stability. Financials, select industrials, IT services, and healthcare are expected to lead this upcycle, while consumer-facing sectors may see a gradual recovery.
Nifty profit growth likely to pick-up from low levels
Source: Motilal Oswal Strategy Report
Valuations across market segments have become more balanced. Nifty 50 valuations are close to historical averages, while mid-cap valuations have improved, supported by steady earnings growth and limited price appreciation. Small-cap valuations, however, remain elevated despite a correction, as earnings growth has lagged. As mentioned earlier, headline indices mask the depth of corrections across several pockets of the market, resulting in more reasonable valuations in many segments. Private banks, IT, and consumer sectors now appear attractively valued. India’s relative valuations versus emerging market peers have also improved amid its underperformance versus global markets in 2025.
Source: Bloomberg, Sanctum Wealth
With earnings momentum improving and relative valuations becoming more compelling, foreign portfolio investors (FPIs) may turn net buyers. FPI ownership of Indian equities is currently at a 12-year low following sustained outflows. Additionally, improving performance of MSCI EM relative to developed markets, particularly the U.S., could support stronger emerging market inflows in 2026. A softer US dollar, amid evolving U.S. policy actions, would further support this trend.
India can deliver stronger earnings growth than EM peers
Source: Anitque Broking, 3QFY26 Earnings Preview Report
Note: for India the numbers used are FY26-28
On the supply side, promoters and private equity investors have been significant sellers, with about INR 2.5 lakh crore raised through IPOs and QIPs in 2025, following INR 2.75 lakh crore in 2024. Despite this, domestic institutional flows (DIIs) have remained resilient in a turbulent year of Indian equities. DIIs invested over INR 6 lakh crore in 2025, surpassing the previous year’s INR 5.6 lakh crore and marking the highest annual net investment since 2007. IPO activity is likely to moderate as some the larger offerings struggled to attract expected interest. Hence, supply could moderate while demand from DIIs and FPIs may be better this year.
2025: Record DII Inflows and Record FII Outflows
Source: Bloomberg, Sanctum Wealth
Overall, we are incrementally more constructive on Indian equities. Our stance remains neutral on equities, neutral between large and midcaps, and underweight small-caps, given elevated valuations and insufficient earnings growth in the segment. Key risks include earnings disappointments, potential contagion from a reversal in the global AI trade, and heightened volatility arising from geopolitical escalation. Accordingly, we recommend that investors stagger fresh allocations to Indian equities rather than deploying capital through lump-sum investments.
Fixed Income Outlook
The RBI has reduced policy rates by a cumulative 125 bps in the current easing cycle and infused liquidity of about INR 15.7 lakh crore through OMOs, CRR cuts, and FX swaps. Abundant liquidity in the first half of 2025 led to a steepening of the yield curve, with short-term rates falling more sharply than long-term yields. In the second half of the year, however, OMOs moderated, FPI inflows into debt declined, and accelerating credit growth reduced banks’ excess SLR holdings, limiting demand for long-duration bonds.
Yield curve has steepened in 2025
Source: Bloomberg, Sanctum Wealth
Looking ahead, the RBI is likely to prioritise transmission of the rate cuts already delivered rather than initiate further easing. This implies a focus on anchoring longer-term bond yields. In this context, the RBI has announced front-loaded OMOs early this year, in addition to those conducted in December. That said, with credit growth picking up and deposit growth remaining subdued, banks’ demand for bonds is likely to stay muted. While the fiscal deficit is expected to remain on a gradual consolidation path into FY27, issuance of longer-dated bonds, particularly state development loans (SDLs), has been elevated.
Against this backdrop, we believe shorter-duration bonds as short term credit spread is attractive and state development loans offer a better risk–reward profile than long-duration bonds at current levels. This exposure is best accessed through short-term bond funds or corporate bond funds. For investors seeking tax-efficient income plus arbitrage funds may be a more suitable option.
As highlighted in our previous commentary, most of the capital appreciation from REITs and InvITs appears to be behind us. Going forward, returns are likely to align more closely with distributions (post-tax 5-6%). Given their listed nature and associated price volatility, these returns do not adequately compensate for the risks. Accordingly, we have exited REITs from our discretionary asset allocation portfolios and SMAPS.
Gold and Silver Outlook
Precious metals, gold and silver, truly had a ‘golden’ year in 2025. Gold rallied over 65%, while silver surged more than 150%, with silver ETFs delivering nearly 40% returns in INR terms in December alone.
De-dollarisation remains a key structural driver for gold. Global central banks are increasingly diversifying reserves away from U.S. dollar assets, and this trend appears durable, given that gold still constitutes a relatively small share of reserves for several emerging market central banks, for instance, less than 10% in China. Gold ETF demand also strengthened through 2025, although some moderation is possible as investors book profits, which could temper near-term upside.
Gold ETF demand catching up with central bank buying
Source: Bloomberg, Sanctum Wealth
Geopolitical uncertainty has been another important tailwind. While concerns around U.S. tariff policy have eased, recent U.S. actions in Venezuela and their execution have added to geopolitical risk premia. Overall, fundamentals remain supportive of gold over the long term. That said, the pace of the recent rally has been sharp, suggesting higher volatility at current levels. Investors who are under-allocated should consider using any meaningful corrections to build exposure.
Silver was the best performing asset class of 2025. Over the last four years silver demand has strengthened materially, driven by its industrial applications, which now account for nearly 60% of total usage. Four consecutive years of record consumption have pushed the market into a supply deficit, estimated at around 21% in 2025. After gold’s sharp rally in 2024 and early 2025, silver appeared relatively attractive, drawing increased investor interest. Limited supply, rising ETF inflows, and growing investor FOMO accelerated the rally, with even some central banks, including Saudi Arabia and Russia, adding silver to their reserves.
While the structural supply deficit is likely to persist, the ETF-driven squeeze may ease. The gold-to-silver ratio has fallen below 60x, though historically it has compressed to as low as 35x, suggesting further upside is possible. That said, given silver’s inherent volatility, risks remain elevated. We therefore recommend only a small, speculative allocation to silver.
