Why investors should not lose hope in Equity

The start of 2026 has been less than encouraging for markets. Tariff-related concerns have resurfaced, unsettling investor sentiment at a time when most believed this chapter was behind us. Yet, one constant in global markets is uncertainty—and recent developments once again highlight how swiftly narratives can change, particularly with Donald Trump back at the centre of global policymaking.

Given this unsteady beginning, the obvious question is: how should investors approach 2026?

Reflecting on 2025: Getting the Big Picture Right

Before looking ahead, it is worth revisiting last year’s expectations. Our base-case forecast for the Nifty 50 was a 10–20% return, and the index delivered a respectable 10.5%. We had also anticipated muted performance from mid- and small-cap stocks, which largely played out.

That said, not all predictions were accurate. We expected foreign portfolio investors (FPIs) to invest ₹50,000 crore to ₹1 lakh crore into Indian equities. Instead, 2025 witnessed the highest-ever FPI outflows in a calendar year. This reinforces a crucial reality: markets are shaped as much by unpredictable global forces as by domestic fundamentals.

As we enter another year of forecasts, it is important to acknowledge that global events are unfolding at an unprecedented pace. Any outlook for 2026 should therefore be viewed as a framework—not a certainty.

Will Gold and Silver Repeat Their Stellar Performance?

Gold and silver were clear outperformers in 2025, drawing significant investor interest. Allocation to precious metals is now at multi-year highs, aided by strong price momentum and recency bias.

However, such widespread optimism often lowers the probability of sustained outsized returns. Our base case for 2026 is muted to potentially negative returns for both gold and silver.

Several factors support this view:

• Central banks are likely to reduce the pace of gold purchases.
• Investment demand should moderate as prices remain elevated.
• Higher prices will encourage secondary supply.
• Industrial demand for silver is expected to remain subdued.

That said, we do not expect an immediate or sharp correction. Prices may remain resilient in the near term and even move higher before gradually giving up gains—much like Bitcoin’s price behaviour in 2025.

Limited Room for Further Rate Cuts

India’s benign inflation environment allowed the RBI to cut rates aggressively—by 125 basis points. Tariff-related pressures also prompted monetary easing to support economic activity.

Looking ahead, inflation is likely to firm up in the second half of 2026. At current levels, there appears to be limited headroom for further easing. Our base case is no major rate cuts, with at best a 25 bps reduction.

Globally, the US Federal Reserve is also unlikely to pursue aggressive rate cuts. Despite political uncertainty and potential leadership changes at the Fed later in the year, inflation risks remain elevated, while the US economy continues to show resilience. That said, when it comes to policy surprises, one should never underestimate the unpredictability associated with a Trump presidency.

FPIs Likely to Return in 2026

India witnessed heavy FPI outflows in 2025, driven largely by stretched valuations and the availability of attractive opportunities in other markets. “Sell India” became a dominant theme.

We believe this narrative is poised to reverse in 2026. Indian equity valuations have moderated, and corporate earnings growth is expected to improve. Historically, years of heavy FPI selling are often followed by strong inflows in subsequent years—frequently exceeding the prior year’s outflows.

With domestic flows remaining robust, a recovery in FPI participation would significantly improve overall market liquidity.

Earnings Growth Sets the Stage for Equity Upside

Stronger earnings growth combined with improving liquidity creates a supportive environment for equities. Our base-case expectation is for the Nifty 50 to deliver 15–20% returns in 2026.

However, leadership within the market is likely to remain narrow. Mid- and small-cap stocks may continue to struggle due to relatively rich valuations and a muted earnings cycle. Large caps, in contrast, are better positioned to outperform for yet another year.

That said, select pockets within the mid- and small-cap space will continue to offer opportunities for discerning investors.

Geopolitics: The New Normal

Heightened geopolitical risk is no longer an exception—it is the norm. The year has already begun with developments involving Venezuela, renewed focus on Greenland, and unrest in Iran. Any escalation could disrupt global supply chains and reignite inflationary pressures.

As long as Trump remains in office, markets should brace for a steady stream of headlines capable of unsettling sentiment.

Monsoon Watch: A Variable to Track

Initial estimates from Skymet suggest the possibility of El Niño conditions emerging in the latter half of the southwest monsoon. If this materialises, rural incomes could come under pressure.

That said, markets historically tend to be less reactive to sub-normal rainfall unless it is severe or prolonged. Nonetheless, monsoon progress will remain an important variable to monitor.

The Bigger Picture: Stay Invested, Stay Disciplined

Despite the challenges and uncertainties, we remain confident that Indian equities can deliver high-teen returns over time. Equity investing is not about predicting one-year outcomes; it is about long-term wealth creation.

The focus should remain on high-quality companies available at reasonable valuations, rather than paying excessive premiums for perceived safety.

Expect volatility in the early months of 2026. Stay invested, remain disciplined, and use market corrections as opportunities rather than reasons for retreat.

Equity rewards patience—and 2026 may well prove that once again.