Edited excerpts from a chat:
As we step into 2026, have things got better for investors in the equity market or do you think the new year would be much like 2025?
The year 2025 has not gone well as Nifty has returned around 10% year to date as on December 16 which has underperformed most of the global markets and would rank as amongst the worst performing markets globally. This has been led by consistent earnings cut through the last year and macro weakness in terms of demand and liquidity in the early part of the calendar year. The earnings cuts combined with valuation triggers in other emerging markets have led to FII selling which has further pressure on the markets. On the positive side, the government has put measures in place to stimulate demand in the form of income tax cuts and GST rate cuts and improved liquidity in the banking system aiding credit growth. These measures implemented in later part of the year will start seeing benefits from first quarter of next year and we are hopeful of decent earnings growth for next fiscal year. Combination of improved macros coupled with earnings growth bodes well for the Indian equity markets.
Despite all the noise that we saw in the year, we are still ending with around 9-10% upside on a headline index level. This would be Nifty’s 10 consecutive year of positive gains. How big an achievement is that from an overall perspective for long-term investors?
Consistent positive returns does give a lot of confidence to the retail investors especially to the first time or new investors who are investing in equity. However, a lot of education has gone into explaining the volatility of equity to the retail investor through various initiatives and we can expect the retail investors to be more matured than before.
But the pain in small caps as well as select midcaps has been troubling a lot of portfolios. Do you see the market improving for them incrementally in the next few quarters?
The earnings outlook for both mid and small cap is on the improving trajectory and should aid in the recovery. However, the valuations of the mid and small cap indices are higher than large caps and we expect large caps to lead the recovery.
Do you think that midcaps are positioned more favourably from earnings growth and valuations as well as compared to small caps?
Since the earnings growth is coming from macro led factors, we expect mid cap earnings growth to pick up and then small caps to pick up. However mid caps trades at 20-25% premium to small caps and valuations could be higher even adjusted for the better earnings visibility.
Which sectors of the market are you bullish on for the next 1 year?
The funds that I manage are managed on the basis of relative value approach and we lay lot of emphasis on the starting valuations of the sectors and stocks we hold, with that in mind, we remain positive on Information technology, Oil and gas, Healthcare, infrastructure sector and telecom sector. We believe that these sectors are priced well for the growth expectations.
What are the risks that investors need to be mindful of as they step in 2026?
The biggest risk is the US trade tariffs and if no resolution is in sight for the next six months, we could see pressure on the current account deficit and big impact on the sectors such as textiles, gems and engineering where share of US exports is high. This is one big risk for the markets.