Jefferies sees range-bound India markets amid macro headwinds

Investing.com -- Jefferies said Friday that India faces range-bound markets due to macro headwinds including higher US yields and oil prices, though the firm maintains a preference for small and mid-cap growth stocks.

The investment bank noted that while SMID growth strategy performed well in 2026, current conditions favor quality and defensive stocks. The firm said long-term SMID drivers remain intact amid rising return dispersion and alpha generation.

India confronts several challenges, according to the report. AI volatility is subsiding, bringing AI supply chain countries back into focus. Rising US yields expose India to funding stress from a flows perspective. Sustained higher oil prices are not conducive for the market. The only positive factor is the potential for dollar debasement.

The MSCI India small-cap index has outperformed the standard index by approximately 14% this year, supported by improving revisions. Small and mid-cap stocks show 20% plus EPS growth and trade at 1.1 times PE/G, compared to 1.4 times for large caps.

Jefferies' SMID, multibaggers, and compounders screens are all up 12% to 15% year-to-date in 2026. The firm's SMID GARP and multibaggers strategies have gained approximately 15% in 2026.

Growth has been the leading style this year for India, including small caps, at the expense of low risk and reversion. Jefferies maintains a preference for growth, stating there is no evidence of a major economic cycle shift that would justify a sustained value or quality rotation.

The firm said India scores poorly on earnings and valuations, making it underweight in its EM country model. Consensus MSCI India FY3/27 EPS growth of 12% is likely to be realized, though growth could accelerate next year less than consensus expects. At 20 times PE and 13% EPS CAGR, India is expensive on a PE/G basis.

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