For India, 2025 was a difficult year economically. The world’s biggest country by population continued to grow but its fortunes were clouded by lacklustre domestic consumption, a slowdown in earnings growth, and US President Donald Trump’s 50 per cent levy on Indian exports. Domestic stock markets trailed their emerging market peers.
As we move into 2026, however, the country’s long-term investment story is intact: a large, young population will fuel consumption, the government is doing more to stimulate growth, and structural reforms are moving forward, reports Nitin Mathur, associate investment director at Fidelity International. The rationalisation of the Goods and Services Tax (GST) and personal income tax cuts leaves more disposable income in the hands of consumers. Higher social spending, lower inflation, and accommodative interest rates should also be supportive of growth.
In contrast to export-oriented China, India's private consumption is a mainstay of the economy, contributing around 60 per cent of the country's GDP. However, while a recovery from the pandemic has fuelled spending by the wealthy, growth of its ‘mass market’ has been slower. In response, the government has rolled out measures to improve middle class purchasing power, and according to Mathur the consumption pattern is showing signs of rebalancing.
Market evolution
While foreign portfolio investment saw a net flow out of India in 2025, domestic institutional investors were a stabilising force, adding another US$90 billion to India’s equity markets. The initial public offering (IPO) market is booming on the back of that demand, with US$43bn raised through IPOs in the last two years, including US$22bn in 2025 alone. Many of those new listings were from ‘new economy’ sectors, giving investors a broader set of investment opportunities.
“The overall market is improving in both breadth and depth,” says Mathur.
He cites financials, which historically traded in line with MSCI India but are currently trading at about 20 per cent discount, offering a rerating potential.
Compared with other emerging markets, Indian stock valuations in general are not cheap, he says, but they are backed by a higher return on equity. Selectivity remains key.
IT services
India’s information technology (IT) services sector has driven the Indian economy and created millions of jobs over recent decades. But the past year has brought challenges.
The artificial intelligence (AI) revolution has spurred drops in valuations, driven by the threat that the traditional roles its staff fulfils for global multinationals will instead become automated. However, Fidelity Portfolio Manager and Global Sector Lead for Technology Terence Tsai says profits and cash generation by these companies are strong, and the AI threat may prove overstated.
“We shouldn't underestimate the amount of data and networking relationship and the know-how of these IT services firm,” says Tsai. “They're increasingly trying to productise their offerings.”
President Trump’s hike of H-1B visa fees for new applicants, which is of particular importance to IT services companies accustomed to importing Indian talent to the country, sparked concern that rising expenses would hurt the sector’s margins. Fidelity analysts, however, believe the new visa costs are manageable because many of these companies are increasingly switching to hiring more local staff in the US, or expanding nearshore or offshore recruitment.
Although India offers long-term structural growth opportunities, it also faces many challenges. The manufacturing sector in India lags many of its regional peers. Further reforms are needed for the country to benefit from the 'China Plus One' strategy that is leading global companies to expand production centres outside China. On the consumer side, annual GDP per capita has grown at a healthy pace but remains below US$3,000. That points to the scale of the opportunity for investors but also to the mountain that is still to be climbed.
As Mathur notes, “We are where China was in 2006, 2007. There is a long way to go.”
China macro update
Peiqian Liu, Asia economist at Fidelity International, shares her current views on China macro in the latest podcast episode:
- Three things to watch about China’s economy in 2026: First, the normalisation of export growth; second, when and how the troubled property sector will stabilise and what the subsequent impact is on consumption; third, how the heavy investment in upgrading manufacturing will bolster employment, especially among younger Chinese.
- As China has cemented its crucial role in global manufacturing supply chains, exports will remain a big growth engine for the economy in 2026.
- But as Chinese leaders have been doubling down on boosting domestic demand, exports may contribute slightly less to GDP growth as the headline growth rate moderates. Meanwhile, domestic demand will remain largely stable as a main contributor to economic growth.
- The renminbi’s appreciation since late 2025 has been mostly driven by China’s record trade surplus, expectation of a weakening US dollar, and the easing of capital outflow pressure. The appreciation is likely to continue in 2026.
