South Asia Strategy Report 2026 - Market Strategy 2026

Feb 03, 2026

We think that similar drivers will help South Asian markets maintain positive momentum across the next two years, but with country-specific factors resulting in different risk balances. As such, we think a diversified exposure within South Asian markets is likely to be able to take advantage of South Asia’s unique market performance, while avoiding risks that are unique to each individual country. Our view is driven by the fundamental macroeconomic transitions that we are seeing across South Asian economies, but where each economy is facing these at different points and at different levels in their economic story.

A broad-based increase in longer-term asset performance - both fixed-income and equity - is the most likely way that we see this story materializing. However, existing areas that are being driven by government-led cash flows and struggle to transition to private sector-led cash flows can still underperform relative to overall performance. Elevated risk levels as a result of geopolitical uncertainty, debt levels and climate exposure can also add to the risk premium in the region. Different exposures to these transitions and risks create slightly different performance across the different South Asian market conditions in our view.

The overall economic story on South Asia - where domestic consumption continues strongly but some investment growth is supported by foreign inflows - is part of our broad expectation as well. However, we do feel that domestic consumption gets supported by greater domestic financial market development compared to the past, which compensates for the transition costs of moving away gradually from deficit-funded consumption in the short term. Some deficit-funded consumption still likely remains a factor, especially if portfolio inflows into the region and into emerging markets as a whole remain buoyant.

Financial market development driven by better macroeconomic performance, greater economic formalization, and shifting demographics is a big part of why we think domestic market developments are likely to come into play. While this creates new growth drivers on the ground, we think that the availability of wider and deeper financial assets can be significant enough to affect the overall market opportunities across the South Asian region.

The two chief risks to this outlook are if a single South Asian economy significantly overperforms the rest (i.e. one investing in a diversified South Asian portfolio will then see lower gains), or if overall economic performance within South Asian markets turns weak across the board. While an aggressive investor might be able to take a bet on any single country, we think relatively high-risk levels makes a more diversified play prudent enough. The most likely context where a single South Asian economy overperforms, probably results in some amount of positive performance in the other South Asian economies as well. The context where overall market conditions weaken will probably also result in a diversified approach being relatively safer than a context where one individual country’s markets could underperform even more compared to the rest.