Monthly Market Outlook May 2026 By Prateek Agrawal

Dear Investor

In this outlook, we will cover the following:

• Continued weakness in Indian stock market and reasons thereof
• Policy response that we have seen
• Spaces in the market that have seen improved investor sentiment as a consequence of events in the middle east and otherwise
• Our portfolio positioning

India continues to be amongst the relatively weaker performing markets globally, while it has rebounded 8+% from the lows seen in March. Korea continues to be amongst the better performing markets. FPIs continued to sell on most days but their selling pressure does seem to be reducing and we have seen a few days of buying. Oil price downward movement from recent peaks of around USD120/bbl on hopes of St of Hormuz opening up has been a key factor supporting sentiment around the world and in India. Our economy is very sensitive to high oil prices on account of balance of payments concern.

Oil prices have been high but in India, the pump prices have been static through the spike. This has helped prevent wider economic stress. However, there are limits to this strategy. While our oil marketing companies made a lot of margins prior to the crisis and may have some cushion, sustained pressure could impact profitability and may require price adjustments. Pump oil prices are rising in countries around us including large oil producing countries. Because of oil, there is added stress on forex. Forex reserves have seen some moderation. While we are having to pay $5-6bn extra a month to buy oil, FPI selling is further impacting forex.

Government response has been to try and accelerate move away from oil, while it is likely to have an impact only over time. Electrification is one of the ways out, with India generating most of its electricity from domestic price controlled coal and renewables. Nuclear power has also come back into focus. Higher blend of domestic CBG with PNG is being accelerated. All of these may result in investment themes.

Efforts to boost exports and reduce imports expected to continue. Focus on domestic manufacturing of imported items is likely to remain a focus area. Schemes are being rolled out for more value addition in spaces like solar module value chain, EVs, BESS, cell phones, etc.

Domestic consumer appears to be responding to the evolving crisis. EV vehicles sales are seen to be moving up coinciding with higher oil prices even while pump prices are, as yet, same as before. This may be on anticipation of a fuel price shock which is already been witnessed in many parts of the world.

Data centres may grow faster than expected with India emerging as a relatively stable geography with competitive cost structures and favourable tax policies.

Another space that may come back into focus is defence. The event in the Middle East may have to gaps in our capabilities and the need to address them with indigenous effort. As an extension, imported consumer goods such as cameras are also getting under scanner and could result in import substitution initiatives.

While price and availability of Oil and Gas is the main focus, this is a year of difficult monsoons as well. Heat wave in the north is creeping in. Lower monsoons, after two years of good rains, may have mixed impact economy. Q1FY27 may see benefit of lower base of last year. Moreover, players in Air conditioning ecosystem and power ecosystem may see better demand.

How are our portfolios positioned?

We think in many ways our house is well positioned across select sectors.

• Commodity price volatility has increased the volumes on exchanges like MCX. Buoyancy in stocks markets may support asset managers and brokers.
• Higher electricity demand on higher temperatures may benefit the whole generation and transmission eco system
• Indigenisation/ import substitution focus of the government may benefit EMS and renewables
• Move away from oil and gas may benefit EVs
• De-dollarization trend seeping the globe may benefits Gold and the players in the ecosystem such as jewellers and lenders may benefit.
• Defence spends may increase and domestic sourcing focus may remain high.

We are growth in earnings focussed house. Above spaces are well-represented in many of our portfolios. Moreover, our house portfolios are relatively low on spaces like Banks and IT services where growth is perceived to be relatively lower and FPI ownership is high a combo that we believe may prolong the selling pressure.

Outlook and time for alpha

The market is still trading 7-8% lower than the February levels. We believe that a lot of worries that were plaguing the market that had led to relative underperformance of our market, have shown some improvement:

• Earnings growth which was a concern, had picked up and sustained for 2 quarters and outlook before the gulf war, for Q4 was positive.
• India had concluded trade agreements with several western blocks, including the US, post which INR which was weakening had shown some strengthening, and FPIs had become buyers.

In some sense, the downtick in our markets seems to be on account of higher oil prices as a consequence of geopolitical events. As oil prices decline to pre War levels, markets may come back to levels seen in Feb. This leaves an immediate upside.

Moreover, in FY26, markets were flat to down while earnings ticked up. Earnings are again expected to see growth in FY27. The markets may reflect earnings growth in FY27 as there is some amount of catchup of FY26 trends over time.

We continue to believe that this is time for alpha. Earnings growth of index is low and most companies are unable to deliver continuous double digit earnings growth. Against the index earnings performance, the newer spaces such as renewables, defence, electronics, EVs, capital market plays, luxury including jewellery, etc. are delivering sustained high growth which we believe is required for positive outcomes in the market. Our portfolios focus on such spaces and we believe are well positioned for the times.

Thank You,
Happy investing
May the Good Times Continue
Source: MCX India, Bloomberg, MOFSL, RBI, NSE Indices. Data as on Apr’26.

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