Hard year ahead for Indian equities, PSU banks offer hope: Systematix Group
Systematix Group's Managing Director Nikhil Khandelwal warns of a challenging 2026 for Indian equities, citing weak consumption growth at 3-4%, modest sales growth for large companies, and export pressures from tariff issues. Despite the cautious overall outlook, he remains optimistic about PSU banks, which have shown improved execution and market share gains over 18 months, specifically recommending State Bank of India, Bank of Baroda, and Union Bank of India. Khandelwal also highlights small finance banks as the strongest potential growth segment due to their shift toward secured lending and geographic diversification.
*this image is generated using AI for illustrative purposes only.
Indian equities are entering 2026 on a cautious note, with market experts warning of significant headwinds ahead. Nikhil Khandelwal, Managing Director at Systematix Group, has outlined a challenging landscape for the year, citing multiple factors that could pressure market performance.
Market Challenges for 2026
Khandelwal's assessment reveals concerning trends across key economic indicators. The investment expert highlighted that large companies are experiencing modest sales growth, while consumption volumes are expanding at a tepid pace.
| Key Challenge: | Impact |
|---|---|
| Consumption Growth: | 3-4% volume growth |
| Sales Performance: | Modest growth for large companies |
| Export Pressure: | Tariff-related challenges |
| Tax Collections: | Concerning trends |
"The data show that we are going to have a hard run as we enter into 2026 and we develop into this year. And on top of that, the export businesses are all kind of suffering from what's happening on the tariff front," Khandelwal explained. He emphasized that the combination of these factors makes 2026 a "hard fought year as far as equities is concerned."
PSU Banks Show Promise
Despite the broader market concerns, Khandelwal maintains a positive outlook on PSU banks, citing significant improvements in their operational metrics. Over the past 18 months, PSU lenders have demonstrated enhanced execution capabilities, better credit quality, and increased market share.
Many large PSU banks are now achieving advance growth rates that exceed system averages while successfully protecting their margins through improved fee income and distribution channels. Khandelwal specifically highlighted several opportunities within this space.
| Recommended PSU Banks: | Key Strengths |
|---|---|
| Bank of Baroda: | Strong loan growth potential, attractive valuations |
| Union Bank of India: | Strong loan growth potential, attractive valuations |
| State Bank of India: | Diversified businesses, improving profitability |
For State Bank of India, Khandelwal advises long-term investors to maintain their positions, supported by the bank's diversified business model and improving profitability metrics.
Small Finance Banks: The Growth Leaders
Khandelwal identified small finance banks as a particularly attractive segment, describing them as potentially "the strongest growing pack in the entire banking space." These institutions have undergone significant structural changes that position them for robust growth.
The transformation includes:
- Sharp reduction in unsecured lending exposure
- Geographic diversification of operations
- Expansion into secured products including home loans and gold loans
- Potential for upgrades to universal bank status
Alternative Investment Themes
Beyond the banking sector, Khandelwal highlighted opportunities in the recycling theme, particularly non-ferrous metal recycling. He expressed preference for export-oriented companies in this space, specifically mentioning Jain Resource Recycling and Pondy Oxides.
These companies offer multiple advantages including ESG benefits, exposure to global demand trends, and strong earnings visibility, making them attractive investment propositions despite the broader market challenges anticipated for 2026.
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