Markets at a crossroads: What 2026 holds for Indian equities

After record highs, markets have become volatile. How worried should investors be about 2026?

We need to contextualise this. We’ve had a phenomenal run over the last three to four years and consolidated this year. Mid and small caps corrected due to stretched valuations and slower earnings growth, which was fundamentally in line with economic performance. We’ve also absorbed significant capacity through new IPOs, and the market has broadened. Excesses have corrected, maybe we’ve undershot slightly, but we’re in better shape than last year. Macroeconomic fundamentals have improved, and we’re seeing reasonable visibility of earnings growth for the next financial year. Things are starting to look up.

With RBI cutting rates, how much of this is priced in for financials?

The rate cut was on expected lines, no surprise there. Some impacts have been flagged on margins in the near term, but medium-term signs are positive, as this should lead to increased credit offtake and earnings recovery. The market has been less focused on the rate cut and more on the trade deal. Until that gets signed, it will remain a concern. Once it does, the currency will stabilise, FPI sentiment could reverse, and that should bring confidence back to domestic investors as well.

Which market segment — large, mid, or small cap — will surprise in 2026?

If FPI interest returns, large-cap stocks will lead the way first. There’s tremendous value there with expected earnings recovery and lower risk. Financials could see extended outperformance. However, we should view mid and small caps differently now—many new sectors are emerging with widening stock bases. The first one to one-and-a-half quarters will likely favour large caps. As confidence returns, mid and small caps should catch up. There’s value in sectors that have corrected nicely.

Which sectors could see a turnaround in 2026?

Financials remain interesting. On the investment side, we like Make in India themes — defence and manufacturing plays — but want clarity on the trade deal first. Consumption is also interesting given GST cuts and tax reductions that put more money in people’s pockets. The budget could be crucial. We’ve seen five to seven landmark legislations this year, and there’s talk of reforms toward becoming a developed economy by 2047. Regulatory easing from bodies like SEBI also augurs well for structural market development.

FPIs are selling in secondary markets but buying select IPOs. Why this divergence?

It’s about value. FPIs believe recent IPOs are structurally positive growth stories for India. There’s slightly more value left on the table now compared to the past, and companies have become conscious of pricing—lessons from recent years. These are exciting stories not already trading in Indian markets, with strong earnings growth potential. Even in block trades, when reasonable discounts are offered, FPIs show interest. The message is clear: at certain prices, there’s appetite.

How do you characterise the 2026 IPO cycle?

The IPO market is driven by value. This year showed how deep our market has become — even when secondary market sentiment wasn’t great, corrections were well bought into when value emerged. If IPOs are priced reasonably, demand will continue from both domestic and foreign investors. We hope the IPO calendar is well spread throughout the year rather than happening in spurts or very large tickets at once.

Gold and silver hit record highs. Is this a hedge or a signal of macro uncertainty?

It’s partly a hedge trade. There are areas of worry globally—exaggerated AI stock valuations and other themes playing out. Commodities act as a reasonable hedge against equity investments. We’ve called the gold move for a while. But some commodity moves are also structural, driven by genuine demand in areas like chip manufacturing. You have to separate transactional business from portfolio hedging. Commodities typically have large moves in certain years, then consolidate. That’s likely already played out.

What’s the single biggest risk for Indian markets in 2026?

Global geopolitics. It was last year’s risk, too and we didn’t predict things would take this long. No one anticipated that the India-US trade deal wouldn’t happen in 2025. Geopolitics is hard to predict and remains the largest risk. Also, we decoupled from global markets this year — we underperformed even within Asian and emerging baskets. If there’s a global correction, we may relatively outperform but still be impacted on an absolute basis.