Indian equity markets are positioned to enter the new year with measured confidence following a year of resilient performance despite notable volatility. Market participants anticipate the upcoming year will be characterized by earnings delivery and selective opportunities rather than broad-based market re-rating, while global uncertainties continue to influence investor sentiment.

Market Performance Review

According to Prateek Nigudkar, Senior Fund Manager at Shriram AMC, the Indian equity markets experienced a challenging but ultimately resilient performance. The year began with significant corrections driven by multiple headwinds that tested market stability.

Despite the early setbacks, benchmarks managed to recover and achieve fresh highs at various points throughout the year. This recovery was primarily supported by strong domestic capital inflows and emerging signs of improving cyclical economic momentum.

Sectoral Performance and Market Dynamics

Large-cap stocks emerged as clear leaders during the market recovery phase. Banking sector stocks and heavyweight information technology companies initially drove the outperformance, followed by consumer-facing companies as spending patterns showed early signs of revival after GST-related policy support measures.

Broader market segments remained more selective, reflecting heightened investor caution regarding stretched valuations and questions about the sustainability of earnings growth across different market capitalization segments.

Capital Flow Patterns and Investment Trends

Capital flows presented a contrasting narrative. Foreign institutional investors maintained a cautious stance, remaining on the sidelines or acting as net sellers for substantial portions of the year. This behavior was influenced by global interest rate dynamics and ongoing geopolitical risks affecting international investment sentiment.

Domestic investors provided crucial market stability during this period. Systematic investment plan inflows remained robust, ensuring consistent capital flow into equity markets even during the most volatile phases. The market successfully absorbed significant supply through large initial public offerings and increased promoter stake sales.

Multi-asset investment strategies gained popularity, particularly as gold and silver rallied to multi-year highs. The precious metals rally helped cushion investment portfolios during a year when equity returns remained relatively modest, reinforcing the importance of portfolio diversification.

Outlook for the Coming Year

Nilesh Shah, Managing Director of Kotak Mahindra AMC, emphasizes that equity returns in the coming year will be anchored in earnings growth rather than valuation expansion. Several positive factors are expected to support market performance.

Mid-cap stocks are viewed as offering relatively better growth potential compared to large-cap alternatives, although market experts caution that performance gaps may remain narrow, making stock selection increasingly critical for investment success.

Export-oriented sectors could benefit significantly if global growth stabilizes and international interest rates ease. Domestic manufacturing and capital goods themes continue to attract long-term investment interest, supported by ongoing infrastructure spending and favorable policy measures.

Investment Strategy Recommendations

Market experts advise investors to maintain balanced portfolio approaches. Fixed income investments are expected to play a larger role in portfolios, offering stability alongside equity investments, while gold and silver may continue providing valuable diversification benefits.

Prateek Nigudkar from Shriram AMC noted optimism for the global macroeconomic backdrop, citing expectations of gradual US Federal Reserve easing, benign energy prices, potential resolution to the Russia-Ukraine conflict, and reduced tariff-related uncertainty.

Motilal Oswal maintains optimistic views on the long-term compounding potential of domestic markets, advising investors to focus on quality businesses and utilize market volatility as opportunities to build exposure to fundamentally strong companies aligned with India's structural growth themes.

PL Asset Management's Siddharth Vora sees Indian markets entering a constructive phase, driven by improving earnings, favorable macro conditions, and attractive valuations despite limited FII flows.

Indian equity markets are positioned for a constructive cycle ahead, driven by improving earnings visibility, supportive macro conditions, and attractive valuations relative to global markets. Siddharth Vora, Executive Director at PL Asset Management, outlined this optimistic outlook while acknowledging ongoing challenges with foreign institutional investor participation.

Market Recovery Reflects Structural Improvements

The recent recovery in Indian markets represents more than year-end optimism, according to Vora. India demonstrates genuine structural strength with robust growth in a low-inflation environment, supported by accommodative monetary and fiscal policies. Risk appetite, which bottomed out around February, has shown steady improvement since then.

Market conditions have become healthier with reduced volatility and easing fear factors. Most significantly, India Inc. appears to have moved past its earnings downgrade cycle, with an earnings upgrade cycle now underway.

Favorable Positioning Amid Global Shifts

India's relative valuation presents compelling opportunities across multiple comparisons:

India's positioning becomes particularly attractive as global investment themes shift. The country did not participate in the AI and cryptocurrency rally, making it a neutral and appealing allocation for global investors seeking stability and growth as those trades unwind.

FII Flows and Domestic Support

While foreign institutional investor buying remains limited currently, Vora emphasized that strong domestic participation has kept markets resilient. He expressed confidence that foreign investor returns are a matter of timing rather than probability, citing India's macro stability, positive earnings outlook, and robust domestic liquidity as compelling long-term factors.

Portfolio Strategy and Sector Allocation

PL Asset Management has adopted a strategic positioning focused on larger market capitalizations:

The firm's current sector preferences include:

• Financials
• Materials and metals
• Energy sector
• Commodities

Vora explained that smallcaps have disappointed on earnings growth while valuations remain elevated, making largecaps and midcaps more attractive with better growth visibility and valuation comfort.

Risk Factors and Long-term Outlook

Several near-term risks warrant attention, including potential unwinding of the Japanese yen carry trade, rupee weakness, and delayed global trade agreements. Over the longer term, India's lack of direct artificial intelligence exposure could impact FII interest levels.

Despite these considerations, Vora maintains that the structural case for Indian equities remains intact. The combination of macro stability, improving earnings momentum, and supportive domestic liquidity provides a solid foundation for continued market performance, even as near-term volatility cannot be entirely ruled out.