Jefferies on Friday signaled an expectation that Indian markets will remain largely range-bound in the near term as macroeconomic headwinds challenge the market’s momentum. The bank highlighted rising US yields and sustained oil prices among the key pressures, yet continued to express a preference for small- and mid-cap growth equities.
In its assessment, Jefferies observed that its SMID growth strategy posted strong returns in 2026, but the prevailing macro backdrop now makes quality and defensive stocks more attractive in the short run. Still, the firm emphasized that structural drivers supporting small- and mid-cap performance have not been eroded. Those drivers, Jefferies said, are consistent with growing return dispersion and the potential for alpha generation across the SMID universe.
The report catalogued a set of challenges facing India. Volatility linked to AI themes has eased, which in turn has refocused attention on countries in AI supply chains. At the same time, higher US yields create exposure to funding stress for India through capital flow channels. Jefferies also flagged that sustained elevated oil prices are unfavorable for the market. The bank identified a single constructive factor - the prospect of dollar debasement - but characterized this as the lone positive in an otherwise constrained macro picture.
Jefferies highlighted recent market performance data to support its views. The MSCI India small-cap index has outperformed the broader index by roughly 14% this year, a move that the firm attributes to improving earnings revisions. Small- and mid-cap companies are reported to be delivering more than 20% EPS growth, and these names trade at about 1.1 times PE/G compared with 1.4 times for large-cap peers.
Performance of Jefferies’ internally tracked strategies has been strong year-to-date. The firm said its SMID, multibaggers, and compounders screens are all up between 12% and 15% in 2026. Its SMID GARP and multibaggers strategies have each returned roughly 15% so far this year.
Style leadership in India this year has tilted toward growth, a trend that has benefited small caps, the report noted. This shift occurred at the expense of low-risk and mean-reversion styles. Jefferies reiterated its growth preference, arguing that there is no clear sign of a broad economic cycle turning sufficiently to justify a lasting rotation into value or a permanent shift to quality.
On valuation and earnings fundamentals, the bank expressed caution. Jefferies said India scores poorly on measures of earnings and valuations and is consequently underweight India in its emerging market country model. Consensus expectations for MSCI India FY3/27 EPS are for about 12% growth, which Jefferies expects will likely be achieved. However, the firm added that while growth could pick up next year, it may do so by less than consensus projects.
The bank summarized India’s valuation backdrop with specific metrics: a price-to-earnings multiple near 20 times and an expected EPS compound annual growth rate around 13%. On a PE/G basis, Jefferies concluded that India appears expensive.
What this means
- Jefferies expects limited upside for Indian equities near term due to macro headwinds from US yields and oil.
- Small- and mid-cap growth strategies have outperformed in 2026 and remain the firm’s preferred exposure, though quality and defensive names are increasingly attractive.
- Valuations and earnings metrics leave India relatively expensive on a PE/G basis despite solid EPS growth among smaller firms.