BNP Paribas sees India regaining EM appeal in 2026; large cap performance, earnings visibility key

The top buy ideas for the brokerage include auto players such as Maruti Suzuki, Mahindra and Mahindra benefitting from GST cuts and growing consumer demand, private banks such as HDFC Bank, ICICI Bank and Axis Bank and life insurance players like SBI Life Insurance, amongst others. Top sell ideas include TVS Motors, Wipro, Jubilant Foods and SBI Cards.

• BNP Paribas expects Nifty 50 to reach 29,500 by end of 2026
• Large caps seen outperforming mid- and small-caps due to better valuations
• Domestic flows to support Indian equities; FIIs remain cautious and selective

Did our AI summary help?

BNP Paribas expects India’s relative attractiveness within emerging markets (EMs) to improve in 2026, after a year in which global investors have remained selective and rotate capital towards themes such as artificial intelligence, China tech and financials, according to Kunal Vora, Head of India Equity Research at the brokerage. By 2026-end, BNP Paribas expects Nifty 50 to reach a target of around 29,500.

Speaking at their market outlook 2025 briefing, Vora noted that India underperformed most emerging markets in 2025 in dollar terms as global investors shifted towards AI-linked stocks and Chinese equities. “India was not a direct beneficiary of the AI theme, which led to relative underperformance versus parts of EM Asia,” he said. The brokerage added that today, India’s valuations are back in line with historical levels making them “comfortable” going ahead.

BNP Paribas believes India could regain favour as and when investors begin to hedge against a potential cooling in the AI rally. Strong domestic flows, resilient earnings growth and macro stability position India as a defensive allocation within emerging markets, Vora said.

On market returns, BNP Paribas expects gains to be largely earnings-led, with limited scope for valuation re-rating. The Nifty 50 is currently trading at around 20.5–21x one-year forward earnings, about 15–20% above its long-term average. With Bloomberg consensus FY27 earnings growth at around 17%, BNP Paribas expects Nifty returns in the low-to-mid teens, broadly in line with earnings growth.

Large caps are expected to outperform mid- and small-cap stocks, driven by relative valuation comfort. Mid-cap and small-cap indices, despite correcting since September 2024, are still trading at approximately 40% and 20% premiums, respectively, to the Nifty 50—well above historical averages, where small caps typically traded at a discount.

“Large caps offer better valuation comfort, stronger balance sheets and more predictable earnings, which is what global investors are looking for at this stage of the cycle,” Vora said.

He added that small caps significantly outperformed in CY23 and CY24 and have delivered strong five-year returns, but valuations remain stretched. On an aggregate basis, they see more scope for underperformance versus large caps.

On FII flows, BNP Paribas expects foreign investors to remain cautious and selective. FIIs have reduced exposure to Indian equities over the past year amid global rate uncertainty and better relative opportunities elsewhere in EMs. Going forward, FIIs are likely to focus on liquid large-cap stocks, balance sheet strength and earnings predictability rather than broad market exposure.

In contrast, domestic institutional flows are expected to continue to remain a key support for the market. Nifty 50 returns have been positive for nine consecutive years, with 2025 marking the 10th straight year of positive returns, aided by domestic participation. With the RBI having cut policy rates by a cumulative 125 basis points, the relative attractiveness of equities versus fixed deposits and other savings instruments has improved, supporting continued inflows via SIPs and mutual funds. The brokerage expects equities’ relative attractiveness to remain for Indian investors in 2026.

From a sectoral perspective, BNP Paribas is positive on large private sector banks, telecom, power, consumer staples and select autos, citing improving loan growth, tariff support, margin recovery and volume momentum. These sectors are largely dominated by large-cap stocks and offer better earnings visibility.

The brokerage is cautious on mid- and small-cap-heavy sectors where valuations remain elevated, including parts of industrial manufacturing, capital goods, real estate-linked names and discretionary consumption, where expectations appear ahead of near-term earnings delivery. It is also selective on IT services, noting limited near-term growth visibility and heightened global competition despite attractive valuations.

The top buy ideas for the brokerage include auto players such as Maruti Suzuki, Mahindra and Mahindra benefitting from GST cuts and growing consumer demand, private banks such as HDFC Bank, ICICI Bank and Axis Bank and life insurance players like SBI Life Insurance, amongst others. Top sell ideas include TVS Motors, Wipro, Jubilant Foods and SBI Cards.

On potential risks in 2026, Vora noted that currently the government had limited “fiscal room” as most of the key decisions have already been announced in previous budget and through the GST with the 8th Pay Commission being another added expenditure. Additionally, while domestic demand for equity has been robust it could not push up valuation multiples in the last two years and was offset by FIIs and rising paper supply through IPOs and QIP. Other risks include crude prices, uncertainity on the India-US trade deal, INR depreciation and continued slowdown in jobs.