Daily Voice: Why India risks losing global capital in 2026 even as emerging markets boom

Arindam Mandal is the Head of Global Equities at Marcellus Investment Managers

• Unless the economy moves into a clear recession, federal funds rate cuts are more likely to be sporadic and data dependent rather than a sustained easing cycle, said Arindam Mandal.

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Unless earnings growth improves materially versus other markets, India may continue to face competition for global capital given its valuation premium, said Arindam Mandal, the Head of Global Equities at Marcellus Investment Managers in an interview to Moneycontrol.

On a net basis, in 2025, foreign flows into emerging markets have been very strong – probably the strongest it has been since 2009. In contrast, India saw meaningful selling in equities and mixed performance in debt this year.

After rate cuts in 2025, he does not expect a smooth or linear monetary easing cycle from the US Federal Reserve going ahead. The risk with aggressive easing is that it can quickly reignite inflation, he said.

On the rupee, he is of the view that over the long run, a low single digit annual depreciation against the dollar is not unhealthy and supports India’s export competitiveness.

Do you believe the US market could post another strong year in 2026?

We think 2026 is unlikely to be a simple repeat of recent years, but opportunities should still exist beneath the surface. The last two years were unusual in how returns were generated. In 2024, performance was driven almost entirely by the AI trade. In 2025, returns came from two very different ends of the spectrum working simultaneously. On one side, high beta AI beneficiaries such as Nvidia, Broadcom and Palantir continued to perform. On the other, inflation beneficiaries and assets linked to monetary debasement, such as global banks and precious metals, also did well, despite the absence of a recession.

What struggled in between was the traditional quality, low volatility segment. After a long period where quality stocks rerated meaningfully between 2016 and 2021, valuations for many of these businesses now look far more reasonable. That segment could start to attract capital again.

At a broader level, the valuation gap that existed across regions and asset classes at the end of 2024 has largely closed. Today, most major markets trade broadly in line with their long term median valuations. As a result, forward returns are likely to be driven less by multiple expansion and more by earnings compounding and positive surprises. This is true not just across markets, but also across different segments within individual markets.

At the index level, expectations in the US remain relatively high, with forward valuations for the S&P 500 and Nasdaq still above long term averages. However, once the mega caps are excluded, the opportunity set looks more balanced. So rather than a broad market call, we would frame 2026 as a year where selectivity matters far more than index exposure.

Do you see the strong AI trade continuing into 2026? If so, does this suggest there is no bubble-like situation?

For the AI trade to sustain itself meaningfully, value creation needs to broaden beyond a narrow set of companies. Over time, the economic benefits of AI should start showing up in productivity gains and earnings growth across other parts of the market.

One way to look at this is the performance gap between the headline S&P 500 and the rest of the market. The S&P 493, excluding the Mag 7, has delivered healthy low double-digit returns, even though it has lagged the index driven by mega caps. We would argue that those returns are reasonable and have come with lower drawdown risk.

This does not rule out pockets of excess within AI related stocks, but it also does not mean the entire theme is a bubble. Our approach remains balanced, with limited exposure to the most crowded AI trades and a greater focus on businesses that can benefit indirectly as adoption spreads.

Do you think the strong economic growth reported by the US in Q3 CY25 will continue in the coming quarters?

US growth has consistently surprised on the upside over the past three years, even as sentiment around housing, consumers and small businesses remained subdued. Much of this growth has been supported by AI related capital expenditure, which has held up investment and productivity.

If monetary policy does not become meaningfully restrictive, there is a reasonable chance that growth drivers broaden beyond AI. That would make the expansion more durable. While quarterly growth will always fluctuate, the underlying resilience of the US economy should not be underestimated.

If yes, could this keep foreign investors away from emerging markets such as India?

The recent foreign investor outflows have been more of an India specific phenomenon rather than a broad emerging market trend. On a net basis, foreign flows into emerging markets have been very strong – probably the strongest it has been since 2009. In contrast, India saw meaningful selling in equities and mixed performance in debt.

This coincided with a period where earnings momentum softened and valuations looked stretched. The setup today is somewhat better than it was late last year, as relative valuations have moderated. However, unless earnings growth improves materially versus other markets, India may continue to face competition for global capital given its valuation premium.

Do you see the outperformance of gold and silver continuing into 2026?

Our stance on precious metals remains unchanged. Gold, in particular, should be viewed as a strategic allocation rather than a tactical trade. Predicting annual returns is difficult, but in a world characterised by high debt levels, geopolitical uncertainty, and periodic monetary easing, having some exposure to gold makes sense for portfolio resilience.

What global investment themes should investors consider for 2026?

Inflation beneficiaries could continue to do well, especially if monetary easing proves excessive and inflation pressures re-emerge. At the same time, for investors with a three-to-five-year horizon, selective opportunities may be emerging in high quality consumer, healthcare and industrial businesses, where earnings have lagged but balance sheets and competitive positions remain strong. These areas tend to look most attractive just before earnings begin to inflect.

Do you see a continuation of the monetary easing cycle under the new US Federal Reserve Chair?

We do not expect a smooth or linear easing cycle. The risk with aggressive easing is that it can quickly reignite inflation. While concerns around employment persist, part of the issue appears to be a shortage of suitably skilled workers rather than a lack of jobs.

Unless the economy moves into a clear recession, rate cuts are more likely to be sporadic and data dependent rather than a sustained easing cycle.

Do you expect the Indian rupee to weaken further against the US dollar in 2026?

We do not attempt to predict currencies precisely. That said, it has been notable that the rupee weakened against USD even as many (if not most) global currencies strengthened against the US dollar. This happened despite US rate cuts, partly because long term US yields remained resilient while weaker domestic consumption pushed the RBI towards easing.

Over the long run, a low single digit annual depreciation against the dollar is not unhealthy and supports India’s export competitiveness. Year-to-year currency moves are difficult to forecast, but this broader trend is not necessarily a negative.