EM Rebound: India Poised for a Strong Comeback After 2025’s Underperformance in 2026.

The investment landscape has undergone a significant transformation in 2025, challenging the long-standing dominance of U.S. equities. The MSCI Emerging Markets Index outperformed the S&P 500 and MSCI World Index with a remarkable total return of 33.6%, marking the most substantial outperformance of Emerging Markets relative to U.S. equities in nearly 20 years. Several macroeconomic factors contributed to this shift, particularly the decline of the U.S. dollar by around 9%, which improved the external financing conditions for Emerging Market assets. Additionally, lower entry valuations at a 13x forward price-to-earnings ratio when compared to developed markets created a favorable environment for new capital inflows and potential valuation adjustments.

India’s performance was notably subdued during this broader Emerging Market rally, with the MSCI India Index returning merely 4%. The country’s challenges, including currency depreciation, slower earnings growth, and heightened foreign investor withdrawals, are significant hurdles. However, underlying positive macroeconomic fundamentals, including fiscal measures and a more favorable monetary environment, suggest that India is well-positioned for recovery. With GDP growth projected around 7%, driven primarily by domestic demand, India is transforming from an expensive growth story to a reasonably valued market with increasing earnings visibility.

Despite the prevailing negative sentiment surrounding India’s investment landscape, several structural reforms and developments could reshape the nation’s economic trajectory. Key factors include India’s recent sovereign rating upgrade by S&P Global Ratings, which broadens the spectrum of potential global fixed-income investors and enhances its international market standing. The expansion of Global Capability Centres and increasing retail market participation further supports domestic demand and employment growth. As trade agreements materialize and consumption remains robust, investors should reconsider their positions on India. The combination of adjusted valuations and improving earnings presents a compelling case for investment, signaling that India’s potential may not yet be fully priced into the market.

Source: The Economic Times

(Expert Note: This report was prepared by the Wealthova team.)