Why India is well placed for recovery after a bruising 2025

Indian equities had a challenging 2025, with the MSCI India Index returning 3% in US dollar terms versus the broader emerging market region’s gain of 30.6%. This underperformance was one of the widest relative gaps in several years. While India continues to be among the fastest-growing economies globally, its GDP growth has moderated from 8-9% to around 7%.

More importantly, India saw a material slowdown in earnings growth last year, which impacted sentiment significantly. The slowdown was driven by margin pressure on rising costs, delayed private sector capital expenditure, and global headwinds including trade and tariff risks.

Now well into 2026, the long‑term growth story remains intact, and the near‑term picture is improving. The earnings downgrade cycle appears to have bottomed as macro conditions turn more supportive. Valuations have reset meaningfully, with India’s premium over other EM peers at decade lows, while relative performance has lagged peers by the widest margin in decades. With earnings momentum poised to recover, the set‑up looks increasingly constructive over the medium term.

Macro and policy uncertainty has eased meaningfully

Firstly, the most visible improvement is on trade. Recent trade deals with the United States and the European Union have reduced uncertainty around tariffs and market access, a big overhang in 2025.

Moreover, the Reserve Bank of India (RBI) has likely concluded its rate-cutting cycle, holding its policy rate at 5.25% in February and shifting its focus towards ensuring adequate liquidity and effective transmission. This is supported by benign inflation and strong external buffers. Foreign exchange reserves stand at around US$709.4 billion as of 23 January, providing comfortable import cover and room for the RBI to manage currency volatility if needed.

Fiscal policy has also been steady. The recent Union Budget was broadly neutral for equities, government capex continuing to grow broadly in line with nominal GDP.

Earnings downgrades appear to have reached a trough

There are signs that conditions are stabilising on the corporate front. The recent reporting season broadly met expectations, with fewer negative results surprises sector-wide. Across our holdings, aggregate operating margins have improved, return on equity remains robust and leverage is low. Earnings growth momentum remains strong.

More broadly, there is improvement in activity. Manufacturing output rose 8.1% year-on-year in December 2025, while overall industrial production increased 7.8%, the strongest reading since late 2023.

As for consumption, with middle class relief delivered last year, demand remains uneven. The rural-urban demand gap persists, although Goods and Services Tax (GST) normalisation pre-Budget should help in narrowing the divide as GST collections continue to grow.

That said, the private capital expenditure cycle remains tentative. While pockets of improvement are evident, corporate investment intentions remain cautious, and it would be premature to characterise this as a broad-based private capex recovery. We would expect an earnings recovery to be more likely led by a stabilising domestic cycle and benefits from public capex, rather than a sharp rise in private investment.

Valuations and flows primed for reset opportunity

After last year’s underperformance, Indian equities have de-rated relative to their own history, and their valuation premium versus both EM and Asia has narrowed meaningfully to more reasonable levels.

Investor flows reflect this reset. Foreign investors sold US$18.8 billion in 2025, the largest annual outflow on record, while domestic investors provided a stabilising offset with record inflows of around US$90.3 billion.

With China having rebounding strongly and AI-related trades now more crowded, relative opportunities across EM are becoming more balanced. In this context, India’s combination of more reasonable relative valuations, stabilising earnings and improving macro visibility has become increasingly more attractive for investors.

How all this benefits the Trust

The Trust remains a portfolio of high-quality stocks. It is well positioned to benefit from improving earnings conditions while maintaining a disciplined approach to risk management. Currency exposure is actively monitored, and internal stress testing indicates resilience even under a scenario of a sharp depreciation of the Indian rupee. We limit exposure to companies with significant foreign-currency debt or heavy import reliance, and instead favours businesses with solid balance sheets, domestic revenue visibility and the ability to compound earnings through economic cycles.

Conclusion

While it is hard to call the exact timing of a sustained recovery, the combination of easing uncertainty, stabilising earnings and more reasonable valuations suggests that the current environment is increasingly supportive for investors looking at India.

Important information

Investment objective To achieve long-term capital appreciation by investing in companies which are incorporated in India or which derive significant revenue or profit from India, with dividend yield from the company being of secondary importance.

Benchmark The Company compares its performance to the MSCI India Index (sterling adjusted). However, the Company’s portfolio is constructed without reference to the composition of any stock market index or benchmark. It is likely, therefore, that there will be periods when its performance may vary significantly from the benchmark.

Risk factors you should consider prior to investing:

The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
Past performance is not a guide to future results.
Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
The Company may charge expenses to capital which may erode the capital value of the investment.
Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information:

The details contained here are for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any investments or funds and does not constitute investment research, investment recommendation or investment advice in any jurisdiction. Any data contained herein which is attributed to a third party ("Third Party Data") is the property of (a) third party supplier(s) (the “Owner”) and is licensed for use with Aberdeen. Third Party Data may not be copied or distributed. Third Party Data is provided “as is” and is not warranted to be accurate, complete or timely. To the extent permitted by applicable law, none of the Owner, Aberdeen, or any other third party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third Party Data relates.

The Aberdeen New India Investment Trust PLC Key Information Document can be obtained here.

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. The company is authorised and regulated by the Financial Conduct Authority in the UK.

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