With better earnings growth in FY27 and a potential trade deal with the US, a return of foreign institutional investors (FIIs) into India is expected in 2026, a report said on Wednesday.

“Overall, we remain constructive on the equity markets for 2026. Nifty valuations at 20.5x 1-year forward Price-Earnings ratio (PE) are in-line with its 5-year average and at a modest premium to 10-year average”, according to the report from HSBC Mutual Fund.

The fund house said it is overweight on banks and non‑bank financial companies (NBFCs), arguing net interest margins for banks should improve in FY27. Private banks’ asset quality is expected to recover and drive mid‑teens earnings growth in FY27 after a slow FY26, the report said.

NBFCs are delivering strong earnings growth driven by strong credit demand and improving margins on the back of decline in interest rates.

The fund house is also overweight in the consumer discretionary sector. Segments such as internet platforms continue to benefit from a strong shift in consumer behaviour towards Quick commerce and e-commerce. Jewellery, autos and travel segments are also likely to benefit from recent government measures boosting disposable income for consumers.

Electronic manufacturing services remains a structural theme driven by strong government focus to build an electronics manufacturing value chain in India, the report said, adding the fund is neutral on IT and industrials, noting FY27 IT earnings could be near double digits supported by Gen AI adoption.

HSBC remained underweight on metals, saying aluminium and steel upside is largely priced in valuations.

The report highlighted 2025 performance divergence with Nifty TRI up 12 per cent to November, NSE Midcaps up 6.5 per cent, while the BSE Smallcap index is down 5 per cent.

“While 2025 has witnessed low earnings growth for the Nifty and tepid equity market performance there have been several positives on the economic front which may support market performance in 2026,” the report noted.

(With inputs from IANS)