Investment bank turns bullish on Indian equities after 2025 underperformance, cites valuation compression to 10-year average, trade deal boost, and expected return of foreign flows as key catalysts
Goldman Sachs Asset Management has turned constructive on Indian equities after the market’s underperformance in 2025, citing improved valuations, rebounding corporate earnings, and supportive policy tailwinds that position the country as a key opportunity within emerging markets this year.
India lagged broader emerging market indices last year, with MSCI India underperforming MSCI EM, triggered by what the investment bank described as “a combination of peak starting valuations last year and a cyclical slowdown in growth and corporate earnings.”
However, the correction has created what Goldman Sachs views as a better entry point for investors. “The underperformance in 2025 has compressed India’s valuation gap with the MSCI EM Index to 66%, aligning with its 10-year average, making its relative valuation more attractive and offering a better entry point for investors,” the firm said in a report titled “Emerging Market Equities: AI, China, and India in Focus” dated February 13.
Earnings Acceleration Expected
The investment manager expects a sharp rebound in corporate profitability after the cyclical slowdown. “Analysts also anticipate an earnings rebound, with MSCI India profits growing 10% for the full calendar year 2025, accelerating to a robust mid-teen growth of 14% for CY26/27, above the 10% EM average excluding Korea and Taiwan,” Goldman Sachs stated, citing its Global Investment Research division.
The earnings acceleration is expected to be supported by policies across financial, industrial, tax, trade, and small business sectors that should bolster economic growth momentum.
Valuation Dispersion Creates Opportunities
While headline market multiples appear elevated, Goldman Sachs pointed out significant dispersion beneath the surface that active managers can exploit. “While headline multiples appear elevated, a closer look reveals significant dispersion; a third of the Nifty 50’s constituents are below their long-term average valuations, especially in financials, select commodity, and consumer discretionary sectors,” the report noted.
The firm sees particular opportunities in fundamentally strong yet under-researched small and mid-cap stocks following the recent valuation compression. “Fundamentally strong yet under-researched small- and mid-cap (SMID) stocks with clear earnings visibility may present opportunities in 2026, especially following recent valuation compression,” Goldman Sachs said.
Domestic Consumption and Digitization Themes
The asset manager highlighted India’s domestic consumption story as a key structural driver. “Businesses are capitalizing on India’s burgeoning domestic consumption market, driven by rising incomes and demographics. Resilient consumer/SME lending platforms and expanding e-commerce capabilities are leveraging lifestyle upgrades and increasing digitization,” the report stated.
Foreign Flows Expected to Return
One of the key catalysts Goldman Sachs anticipates for 2026 is a revival in foreign investor interest after allocations hit multi-decade lows. “Domestic institutions, supported by ongoing retail/systematic investment plans (SIP) flows, continue to be buyers of Indian equities. However, foreign ownership and mutual fund allocations are near two-decade lows,” the firm noted, citing research as of January 23, 2026.
The investment bank sees potential for improved foreign flows this year, supported by several factors including rebounding corporate earnings and trade deal finalizations. “We see potential for improved foreign flows in 2026, supported by rebounding corporate earnings, and finalization of trade deals with the EU (which accounts for approximately 18% of India’s exports) and the US (which accounts for approximately 20%),” Goldman Sachs said.
The recently signed US-India trade agreement received specific mention as a positive catalyst. “The US-India deal, signed in February, includes a reduction in ‘reciprocal’ tariffs on Indian goods imports from 25% to 18%,” the report stated, citing Goldman Sachs Global Investment Research data from February 3, 2026.
Currency stability was also flagged as a potential sentiment booster. “A softer dollar and INR stability could also provide the sentiment boost that was missing in 2025, potentially triggering a meaningful rebound in flows and a market rally,” the firm added.
Active Management Advantage
Goldman Sachs emphasized that India’s market characteristics favor active fund managers over passive strategies. The firm argued that limited research coverage and increasing return dispersion create fertile ground for alpha generation, with active managers in India having consistently outperformed benchmarks by employing flexible, all-cap strategies that access companies outside major indices.
The optimistic outlook on India forms part of Goldman Sachs Asset Management’s broader emerging market strategy, which also identifies opportunities in AI-driven technology innovation across Asia and China’s export reorientation and tech innovation as key investment themes for 2026.
