What is the story about?
Domestic equity markets are likely to perform better in 2026 compared with 2025, supported by improving valuations, a resilient growth outlook and renewed
interest from foreign investors, according to Punita Kumar Sinha, Founder and Managing Partner at Pacific Paradigm Advisors. In conversation with ET Now, Sinha said that while 2025 was marked by volatility and global uncertainty, several headwinds that weighed on Indian markets over the past two years are now easing. “India’s growth story remains quite solid. Valuations, which were the biggest concern in 2024 and early 2025, have now come back closer to 10-year averages. They are not cheap, but they are no longer expensive,” she noted.
India offers diversification as AI trade faces valuation concerns
Sinha pointed out that global investor attention over the past year has been dominated by the artificial intelligence trade, particularly in developed markets. While the long-term AI growth story remains intact, she cautioned that stretched valuations could lead to a reversal in market sentiment.
“If there is any unwinding of the AI trade, India offers a good hedge and diversification for global portfolios,” she said, adding that this could prompt foreign institutional investors (FIIs) to re-evaluate India more favourably in 2026.
Financials remain core to portfolios
Addressing sectoral opportunities, Sinha said financials continue to form the backbone of the Indian economy and should remain a core allocation for investors. She highlighted the breadth of the sector, spanning banks, NBFCs, housing finance companies, asset managers, brokers and fintech players.
“There are ample stock selection opportunities within financials, across private players, PSUs and specialised lenders,” she said, noting that valuations have also become more attractive after recent underperformance.
Selective IT, real estate and capex themes to watch
On the IT sector, Sinha said concerns around AI replacing traditional IT services have weighed on sentiment, but valuations are now more reasonable.
However, she also cautioned that future performance will hinge on innovation rather than broad-based sector growth.
“It will not be a sector-wide success story. There will be winners and losers, and companies that innovate more will do better,” she said.
Sinha also flagged real estate as a potential opportunity, pointing out the disconnect between rising on-ground property prices and lagging real estate stock performance. With interest rates stabilising, she believes the sector could see renewed investor interest.
Capital expenditure-linked themes and capital goods stocks could also benefit in 2026, particularly after sharp corrections in several small- and mid-cap names this year. “India needs to keep adding capacity, and valuations in parts of this space are starting to look attractive,” she added.
Stock selection key as IPO pipeline caps returns
Looking ahead, Sinha said 2026 is likely to be a stock-picker’s market, with bottom-up investing becoming increasingly important.
While she has expected that broader participation from mid- and small-cap stocks, she cautioned that a heavy IPO pipeline could cap overall market returns.
“There have been many IPOs in 2025, and if markets recover, more will follow. That always puts some pressure on returns,” she said.
That said, she remains constructive on India’s macroeconomic backdrop.
“Most macro variables are looking reasonably healthy. If trade deals progress, exporters—who have been significant underperformers, could also benefit,” she added.
For SMIDs, she said that midcap and smallcap stocks could deliver relatively better performance in 2026, driven by improving valuations, selective earnings visibility and a revival in domestic growth themes.
Several stocks in these segments have undergone sharp corrections in 2025, bringing valuations to more reasonable levels and improving the risk-reward balance.
"However, stock selection will remain critical, as performance is likely to be uneven, with quality balance sheets, strong cash flows and scalable business models emerging as key differentiators in the mid- and small-cap space," according to her.
What about consumption and auto sector stocks?
On consumption, Sinha said the theme plays out largely through bottom-up stock selection rather than broad sector rallies. She noted that financials and real estate also act as indirect consumption plays.
Auto stocks, particularly two-wheelers, could remain in focus as rural demand shows signs of recovery.
“Autos are clearly a consumption story, and the sector has done relatively well compared with others this year. Two-wheelers could be a reasonable space to be invested in,” she said, while avoiding stock-specific calls.
How midcap and smallcap stocks fared this year so far
In contrast, the Nifty Smallcap 100 declined 6.86 per cent during the same period. The smallcap index fell by 1,301 points, slipping from 18,959.80 to 17,658.80.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
