Indian equities expected to outshine other asset classes in FY26, say smallcase Managers; poised for 12–15% returns

Mint

20-05-2025

Despite global trade headwinds and persistent geopolitical uncertainty, equities are expected to emerge as the best-performing asset class in FY26, according to smallcase managers. Backed by attractive valuations, a resilient macroeconomic environment, and a favorable earnings trajectory, India's capital markets are projected to maintain a steady growth path, with experts anticipating Nifty 50 returns of 12–15 percent in the coming fiscal.
India's equity market outlook for FY26 remains constructive, buoyed by projected GDP growth of 6.2–6.5 percent and strong domestic demand. The Nifty 50 is expected to deliver double-digit returns, supported by earnings per share (EPS) estimates of around ₹ 1,160. Foreign Portfolio Investors (FPIs) have also shown renewed enthusiasm, pumping over USD 4 billion into Indian equities in recent sessions.
Shailesh Saraf, smallcase Manager and Founder of Value Stocks, noted that as of May 18, 2025, a total of 878 companies had reported their Q4FY25 earnings, reflecting a 10 percent year-on-year growth. While the full-year FY25 earnings grew by only 5.79 percent—down sharply from 35.1 percent in FY24—market sentiment showed notable improvement. This was mirrored in FII net inflows of ₹ 16,757 crore in FY26 so far, along with an 8 percent return from the Nifty 50 and a 10 percent gain in the Smallcap 100 index.
Meanwhile, Robin Arya, smallcase Manager and Founder of GoalFi, said a cautiously optimistic stance for FY26 is justified. According to Arya, a stable government, lower interest rate prospects, and improving corporate earnings form the bedrock of market resilience. He added that while global trade frictions and tariff risks may intermittently weigh on sentiment, sectors like banking, autos, and infrastructure continue to show solid earnings strength. Theme-based investing and earnings consolidation are likely to be prominent in the coming months.
Dr. Prachi Deuskar, smallcase Manager and Co-Founder of Lotusdew, highlighted that Q4FY25 marked a turning point in domestic demand recovery, led by rural consumption, favorable crop yields, and pro-growth government measures. She observed that corporate margins expanded due to declining input costs in metals, energy, and chemicals, along with enhanced operational efficiencies. Despite some concerns such as a weakening INR and signs of urban demand fatigue, India's inflation remained largely under control, offering a stable macro backdrop. Adding to that, Dr. Deuskar suggested that long-term investors with higher risk tolerance may find strong value in high-quality small-cap stocks.
FY25 Earnings Review: smallcase managers pointed out that Q4FY25 earnings exceeded expectations, aided by healthy sales and profit growth. However, the trajectory of forward earnings revisions remained mixed, as downgrades continued to outweigh upgrades, driven by subdued corporate investment momentum. Notably, the market fully recovered from its early-year decline over the last two months. Year-on-year, Nifty companies posted 9 percent growth in sales, 6 percent in EBITDA, 10 percent in PBT, and 4 percent in PAT—mostly ahead of earlier estimates.
With inflation below 4 percent, real interest rates have turned significantly positive, paving the way for potential policy rate cuts. According to smallcase managers, this macro shift could support corporate investments and consumer spending, particularly benefiting the banking, real estate, and auto sectors. Equities are likely to rally further on the back of improved earnings and increased liquidity.
Despite global uncertainties such as potential US tariffs and trade policy disruptions, sectors including infrastructure, BFSI (especially PSU banks), electronics and EMS, automobiles, FMCG, and renewable energy remained on the managers' radar. Meanwhile, they advised caution toward IT, pharmaceuticals, chemicals, capital goods, and real estate, which may remain under pressure due to external headwinds and valuation concerns.
Defence: India's defence sector is poised for robust expansion, backed by an INR 1.8 trillion capex outlay and a USD 130 billion opportunity over FY25–29. The segment is projected to grow 7–8 percent annually, with defence electronics expected to outpace the broader industry at 10–14 percent CAGR. Private players are seen delivering 25–40 percent EPS CAGR, compared to 15–18 percent by defence PSUs.
Consumer: The consumer sector is expected to bounce back in FY26 with projected earnings growth of around 13 percent. Easing input costs in the latter half of the year, a normal monsoon, rising rural wages, and possible fiscal stimuli such as the 8th Pay Commission and tax cuts are likely to support recovery. With the sector having corrected nearly 35 percent since October 2024, valuations are deemed attractive, particularly for segments like packaged foods, QSR, and personal care.
Tourism and Hospitality: India's hospitality sector remains in a multi-year upcycle, propelled by strong domestic travel, mega-events, and a bustling wedding season. With limited new supply, the sector is set to deliver double-digit revenue growth in FY26, driven by India's economic momentum and demographic tailwinds.
FY25 witnessed unprecedented activity in capital markets, marked by 318 IPOs, including 239 SME offerings. The trend is expected to continue in FY26, underpinned by improved market infrastructure, deepening retail participation, and robust fundamentals. Wealth management firms and asset management companies (AMCs) are expected to benefit from these dynamics.
Overall, even amid global trade uncertainties and potential tariff shocks, smallcase managers maintain a positive outlook for India's equity markets in FY26. Favorable macro conditions, resilient corporate earnings, policy tailwinds, and attractive valuations create a conducive environment for equities to outperform. While selective sectoral bets will be key, the broader market narrative remains anchored in stability and sustainable growth, making FY26 a promising year for equity investors.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.