Is Nifty fairly valued? HSBC MF expects FPI return in 2026 on likely India-US trade deal

After a year described as ‘tumultuous’ for domestic equities, marked by shifting US trade policies and divergent index performances, the street is looking for a reset button. HSBC Mutual Fund, in its latest outlook note, has struck a ‘constructive’ tone for 2026, pinning its hopes on a revival in foreign inflows, robust economic surprises, and valuations that have cooled off.

Currently trading at 20.5x one-year forward price-to-earnings (PE), the Nifty is trading in-line with its 5-year average and sits at only a modest premium to its 10-year average, HSBC MF said. 

This valuation comfort comes after a year where the MSCI India index significantly underperformed emerging markets (EM) over the last 14 months, bringing India’s valuation premium relative to EMs back to historical norms, the mutual fund said.

One of the strongest arguments for a bull case in 2026 is the potential reversal of foreign institutional investor (FII) flows. The note highlights that 2025 was driven by continued changes in the US trade and tariffs policy, which kept markets on edge. However, looking ahead, HSBC MF expects a return of FII investors into India, catalysed by two main factors: better earnings growth visibility in FY27 and hopes of a potential trade deal with the US, it said.

The macroeconomic data is doing the heavy lifting. The note points out that India’s economic momentum has continued to surprise on the upside, underscored by real GDP growth of 7.8 per cent and 8.2 per cent for the first and second quarters of FY26, respectively.

Supporting this growth is a pivot in monetary policy. The Reserve Bank of India (RBI) has already eased liquidity significantly and slashed repo rates by 125 basis points (bps) so far, HSBC MF said.

With benign inflation trends, the fund house believes the window is open for further interest rate cuts, which is already showing up in improved credit growth.

Sectoral to watch

HSBC MF remains positive on banks and NBFCs. Net Interest Margins (NIMs) for banks have bottomed out in FY26 and are set to improve, while asset quality for private banks is on an upward trajectory. This setup is expected to drive mid-teens earnings growth in FY27 after a slow FY26, it said.

The mutual fund is also overweight on the consumer discretionary sector—specifically internet platforms benefiting from the shift to quick commerce, as well as jewelry, autos, and travel segments. Additionally, Electronic Manufacturing Services (EMS) is flagged as a structural theme driven by government policy.

Conversely, the view on IT is ‘Neutral’. While Gen AI adoption and rupee depreciation offer support, the mutual fund expects earnings growth to be largely in the near double digits. The stance on Industrials is also ‘Neutral’, with the fund waiting for increased allocation for capex in Budget 2026 as a key catalyst.

Metals, however, find themselves in the underweight category. Despite seeing upside risks to aluminium and steel prices, the note suggests that a significant part is already captured in the valuations.