<div id="readability-page-1"><div><p>Firm crude oil prices have stoked fears of higher inflation in the months  ahead. <strong>Candace Browning</strong>, head of BofA Global Research, tells  <strong><em>Puneet Wadhwa</em></strong> in an email interview that, as things stand, equity investors may be underestimating central bank commitment to controlling inflation by slowing the economy through rate hikes. Edited excerpts:</p></div><div><div><div id="article-index-0">  <p><strong>How would you summarise the overall global equity market mood against the backdrop of geopolitical developments?</strong><small> </small></p> </div><div id="article-index-1">  <p>  According to the May 2026 Global Fund Manager Survey, which polled 200 asset allocators managing a combined $517 billion in assets under management (AUM), investor sentiment was notably optimistic. Equity allocations recorded a historic monthly increase, up 37 percentage points to a net 50 per cent overweight, while cash levels declined meaningfully from 4.3 per cent to 3.9 per cent of AUM. This shift was driven by a surge in confidence around corporate earnings and global growth prospects, with only 4 per cent of surveyed investors anticipating a hard landing.<small> </small></p> </div><div id="article-index-2">  <p>  At the same time, geopolitical concerns related to Iran remained relatively contained, as 54 per cent of respondents expect the Hormuz Strait bottleneck to be resolved by the end of June. That said, we do not believe that the current environment signals the beginning of a prolonged recession. We are forecasting real GDP (gross domestic product) growth of 2.2 per cent in both 2026 and 2027. However, the most likely catalyst for a downturn, outside of a significant spike in oil prices, would be a disorderly rise in government bond yields.</p> </div><div id="article-index-3">  <p><strong>What are bond markets signaling today that equity investors may be overlooking?</strong><small> </small></p> </div><div id="article-index-4">  <p>  Global bond markets are currently signaling two main concerns. First, that inflation is broadening and central banks are behind the curve; second, fiscal concerns and questionable investor demand. Equity investors might be missing the central bank commitment to controlling inflation by slowing the economy via rate hikes. With sovereign debt levels rising across economies, we believe debt becomes a bigger issue than inflation when the rate of interest on government debt is greater than nominal GDP growth.</p> </div><div id="article-index-5">  <p><strong>Where do you see global capital flowing over the next 12-18 months?</strong><small> </small></p> </div><div id="article-index-6">  <p>  Emerging and frontier markets will continue to receive good inflows. Global investors are still under-allocated to emerging markets (EMs). Once tensions surrounding Iran subside, EMs should again benefit from cheaper energy, a weaker US dollar and lower interest rates. India is a key beneficiary of this outlook. China benefits from the tech story, and frontier currencies are in demand for high and uncorrelated carry.<small> </small></p> </div><div id="article-index-7">  <p><strong>Identify one financial market for us that investors should watch most closely over the next year.</strong><small> </small></p> </div><div id="article-index-8">  <p>  India could be a pivotal market. So far this year, it has suffered due to its dependence on energy imports; however, when energy flow eventually normalises, the losers of the past few months will likely become the winners of the rest of the year and possibly next year. We should also not forget how bearish markets were on crude oil at the start of the year as supply was abundant.</p> </div><div id="article-index-9">  <p><strong>Any year-end targets for the Nifty? Key risks to your estimates?</strong><small> </small></p> </div><div id="article-index-10">  <p>  Our year-end target for the Nifty is 26,200, implying about a 10 per cent return in local currency terms from current levels, but flat returns for the year overall. We expect India to underperform larger EMs in the near-term.<small> </small></p> </div><div id="article-index-11">  <p>  The biggest near-term risks stem from the ongoing West Asia conflict, which affects India’s growth, fiscal and current account deficits, and the rupee given its reliance on imported energy. Rising inflation could necessitate policy rate hikes and weigh on corporate earnings, where we forecast 8.5 per cent growth in FY27 versus 15 per cent expected by the market.</p> </div><div id="article-index-12">  <p>  As a result, further valuation expansion appears unlikely, and there is downside risk of additional valuation compression if the conflict is prolonged, especially given that the Nifty still trades at a slight premium to long-term averages. On the opportunity side, potential policy reforms aimed at improving energy security, boosting capex, and attracting foreign flows could strengthen long-term growth visibility. A resolution of the West Asia conflict, a peak in global artificial intelligence (AI) capex, and meaningful policy action could serve as catalysts for a structural return of foreign institutional investors to India.</p> </div><div id="article-index-13">  <p><strong>Are there any sectors in the Indian context that you find investible?</strong><small> </small></p> </div><div id="article-index-14">  <p>  The financials sector, especially represented by large banks, offers good value in our view. We see opportunities for structural growth within capital market plays, hospital and consumer discretionary sectors such as travel and tourism, quick commerce and jewellery, and are positively biased for sectors that could benefit from policy push towards energy security, such as power financiers, generators and transmission companies.</p> </div><div id="article-index-15">  <p><strong>Where are we in the current commodity cycle (precious metals, other metals)? Is that the contrarian theme that investors are missing right now?</strong><small> </small></p> </div><div id="article-index-16">  <p>  Regardless of the outcome of the war, we expect three major trends to emerge from the increased geopolitical friction in the world today: greater strategic stockpiling of key commodities, a faster push towards electrification, and the diversification of supply chains and sources. In our view, these medium-term trends are bullish for key industrial metals. Add resource nationalism, underinvestment in mining, large government budget deficits and a tight global electricity market, and the ingredients are in place for a multi-year bull run in industrial metals, with recession being the most obvious downside risk to prices. In our view, the one theme investors are not focusing on enough in commodities is agriculture. The effects of El Niño could combine with a shortfall in key agricultural imports and drive prices of commodities such as corn and soybeans much higher.</p> </div><div id="article-index-17">  <p><strong>If you had to place one high-conviction, contrarian bet for the next three to five years — something markets are underappreciating today — what would it be and why?</strong><small> </small></p> </div><div id="article-index-18">  <p>  Long consumer stocks present a compelling opportunity. US consumer discretionary, on an equal-weighted basis relative to the S&amp;P 500, is now at lows not seen since the global financial crisis. Our May 2026 Global Fund Manager Survey showed that consumer staples was the most underweight sector at net 28 per cent underweight, with consumer discretionary ranking second at a net 18 per cent underweight. Consumer stocks have priced in stagflation more than any other sector, and we view them as a favoured contrarian trade ahead of a potential US political pivot aimed at addressing consumer affordability.</p> </div><div id="article-index-19">  <p><strong>How do you see global central banks responding to developments over the next few months?</strong><small> </small></p> </div><div id="article-index-20">  <p>  With the stagflationary shock emerging from the Iran war, we expect global monetary policy to be tighter than what we expected earlier this year, but there are important differences across regions. In the US, we expect the Fed to remain on hold this year though the risk of hikes is increasing as inflation surprised on the upside and the economy remains resilient. However, it is too early to talk about hikes.</p> </div><div id="article-index-21">  <p>  In Europe, we now expect the ECB to deliver 50 basis points (bps) of rate hikes, though we expect the central bank to reverse course next year. In a more extreme case, we have moved from expecting cuts from the Bank of England to pencil in hikes after the energy shock. Overall, we expect tighter monetary policy, but the idiosyncrasies of different economies and biases among policymakers can drive somewhat different policy paths.</p> </div><div id="article-index-22">  <p><strong>Do you think the best phase for AI-related stocks across markets such as the US, Korea, China is over and investors would soon start to question the investments being made by companies into AI?</strong><small> </small></p> </div><div id="article-index-23">  <p>  The narrative around AI often appears overhyped in the short-term, much like prior transformative technologies such as the internet, Cloud computing, and mobile broadband. However, history suggests these innovations tend to become underappreciated over time as their full impact materialises. AI is already delivering a powerful layer of intelligence with the potential for significant productivity gains across industries, though reaching that potential requires substantial upfront investment that is currently driving strong revenue growth without commensurate profitability, reinforcing perceptions of hype. At the same time, US Cloud operators are experiencing some of their fastest growth in years across areas, such as search, e-commerce, social networking, and coding, supported by fully utilised AI infrastructure, while companies like OpenAI and Anthropic are growing at three to five times year-on-year and accelerating infrastructure deployment.</p> </div><div id="article-index-24">  <p>  Supply constraints remain a critical factor, as demand for premium AI chips far exceeds availability, with shortages in memory, wafers, substrates, and lasers leading to extended lead times and, in some cases, vendors being sold out for the next one to two years. Importantly, AI is a global race rather than a US-only phenomenon, with countries seeking self-sufficiency in building their own capabilities, even as power limitations push consideration of data centre expansion beyond the US.</p> </div><div id="article-index-25">  <p>  Against this backdrop, Nvidia, a key leader in the space, is trading near a market multiple, suggesting valuations are not yet stretched assuming capital expenditure continues, and overall, regardless of whether concerns of a bubble emerge, the pace of AI investment and deployment is unlikely to slow over the next 12 to 24 months.</p> </div><div id="article-index-26">  <p><strong>How do you see AI reshaping global banking and investment research?</strong><small> </small></p> </div><div id="article-index-27">  <p>AI is set to reshape how banking services are delivered and consumed across retail, wealth, and payments, enabling more personalised and real-time customer experiences. At the same time, it offers a significant productivity boost by automating back-office, compliance, coding, and other repetitive workflows, allowing firms to reallocate resources toward revenue-generating activities, even as markets like India debate its potential impact on BPO jobs. This technology also creates the potential for market share shifts, as banks with scale, talent, and early adoption capabilities could gain advantage, while slower or smaller players risk falling behind. However, consistent with prior waves of technological change from online to mobile to cloud, AI is more likely to reshape incumbents than fully disintermediate them, given their established customer bases and ongoing investment in technology. At the same time, AI amplifies cyber and model risks, necessitating continued investment in defenses and closer coordination with regulators and government agencies.</p> </div></div></div></div>

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<p>Candace Browning of BofA Global Research highlights that global investors remain under-allocated to emerging markets, particularly India. While equity sentiment is optimistic with historic overweight positions, bond markets signal inflation and fiscal concerns. Browning forecasts real GDP growth of 2.2% for 2026-2027 and sets a year-end Nifty target of 26,200. Key risks include West Asia conflicts and rising inflation, while opportunities lie in financials and sectors benefiting from energy security policies.</p>

Global investors still under-allocated to emerging mkts: Candace Browning