Expert view: India may emerge as 'surprise market' in 2026, to benefit from shift in global investment theme shift

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At previous close, the Sensex was up 158.51 points (0.19 percent) at 85,265.32, and the Nifty was up 47.75 points (0.18 percent) at 26,033.75

Despite a prevailing sense of despondency in the Indian market, driven by significant underperformance against other emerging markets, rupee depreciation, and a stalled trade deal, India could emerge as a 'surprise market' in 2026, according to Prashant Paroda, Portfolio Manager for Emerging Markets at Allspring Global Investments. Speaking with CNBC TV18, Paroda acknowledged the current challenges that have dampened investor sentiment but maintained a patient and forward-looking perspective on the market's potential.

Paroda noted that while India was previously a top-three market for capital allocation, recent headwinds have altered the immediate picture. "The market's definitely been challenged with the rupee depreciation…and also the trade deal kind of being pushed back," he stated. He suggested that a resolution to the trade deal might take longer than the market anticipates. However, he pointed to a significant domestic catalyst on the horizon: the (US) Supreme Court's ruling on IEEPA tariffs (International Emergency Economic Powers Act). Expected towards the end of the year or in January, this ruling could fundamentally "change the course of how tariffs have been administered so far," offering a potential boost to the market.

Looking ahead to 2026, Paroda believes India stands to benefit from a potential shift in global investment themes. He observed that markets like Korea, Taiwan, and to some extent China, have rallied significantly on the artificial intelligence (AI) theme. He suggested that if and when this theme undergoes a period of "digestion," capital could rotate back towards markets like India. "If and when, you know, there is some digestion point to the AI theme, I think India stands to gain from that perspective," he commented.

Addressing the strategy for foreign institutional investors (FIIs), Paroda highlighted the low current holdings in India as a key factor that could precipitate a strong return. Should FIIs re-enter the market, he expects their focus to be squarely on the large-cap segment. "If they do come back, I think it would be at the large caps first. So my sense is that always be on the lookout for stock ideas in the larger cap plays," he advised. He also pointed out that even in a flat market, there has been significant dispersion, with certain stocks outperforming. Citing the auto sector as an example, he noted that stocks like Maruti and Mahindra have performed well, indicating that the market is actively trying to identify winners even in a challenging environment. This underscores the importance of stock selection and watching for potential breakout candidates among large-cap names in anticipation of renewed foreign investment.