Monthly Investment Outlook - May 2026

Each month, we step back from the day-to-day noise to focus on what is shaping markets, how these forces are evolving, and what they mean for portfolios. Looking at the broader picture helps bring clarity to what is changing, what remains intact, and how we are positioning.

After a volatile March, Indian equity markets recovered strongly in the second half of April. Equities delivered one of their strongest monthly gains in over two years. The recovery was broad based with mid cap and small cap stocks seeing sharp gains. However, momentum has softened in May as uncertainty related to the West Asia crisis remains elevated. Oil prices have creeped higher, and increased pressure on the currency has caused higher volatility. In fixed income markets, bond yields were range bound but with an upward bias. April CPI inflation came below expectation at 3.5% YoY. However, the consensus expectations for inflation in the coming months remain elevated. This has caused markets to start pricing in a rate hike by the RBI.

Looking ahead, markets will continue to focus on how long the West Asia crisis continues and its impact on oil prices and the currency. While corporate earnings so far have been good, management guidance and commentary is being closely watched for indications of how the recent uncertainty is being addressed by the companies. Markets are also going to closely watch government support measures as well as domestic investor resilience which has been cushioning foreign investor outflows.

Our positive view on India equities continues. However, the conflict has continued for longer than we or the market expected. In such a scenario, risk management becomes important, and we need to start evaluating extreme scenarios. We haven’t abandoned our positive view on Indian equities, but we have slightly reduced the extent of our optimism towards equities to protect against any tail-risk event. We will remain agile and nimble and take action when there is resolution or further development on the conflict situation. While the West Asia conflict has been a near term negative for India given the sensitivity to oil and gas prices, India’s macro position today is stronger than in past geopolitical shock episodes, with healthier banking sector and corporate sector balance sheets, improved fiscal situation and an improving growth backdrop.

Equity valuations have started to look attractive across select segments of the market. Near term company earnings are likely to face some pressure from recent events, particularly as higher commodity prices impact profit margins. We continue to closely monitor management commentary on earnings to assess the durability of margins, demand conditions and forward guidance.

Within equities, our relative preference has changed towards large caps and small caps versus the earlier preference for midcaps. Our relative preference is basis our signals which are highlighting relatively better earnings expectations trends for small caps and large caps even as mid-caps continue to show strong earnings growth.

Within fixed income, our preference for shorter maturity remains intact. While the RBI continues to maintain a supportive stance on liquidity and policy rates, pressure on the longer end remains due to inflation dynamics, currency risk and fiscal deficit risk.

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