Indian markets still costly but defensible: Where Prateek Agarwal sees opportunity in 2026

2025 saw India decouple from global markets

Speaking to ET Now, Agarwal said Indian markets underperformed global peers in 2025 despite strong domestic reforms, largely due to heavy FPI selling. While global themes such as defence, renewables, EVs and new-age tech performed well overseas, many of these sectors saw sharp profit-booking in India, leading to a divergence from global trends.
“Valuations were a concern at the start of last year. They are less so now, even though India is still not cheap globally,” Agarwal noted. Lower global bond yields and a stable rupee, he said, could restore market normalcy and attract risk capital back into India.

Broader market recovery hinges on earnings and FPI flows

Agarwal said the pain in midcap and smallcap portfolios stemmed from sustained FPI selling, which triggered selling by HNIs and retail investors, narrowing market breadth. A reversal, he believes, will require a combination of strong corporate results and renewed foreign inflows.
“Q2 results were encouraging and Q3 should be better. Markets ultimately follow earnings growth,” he said, adding that improved India–US trade relations could act as a sentiment booster for FPIs. Stability in currency, rather than its level, is also critical to draw hedge funds and global performance-seeking investors back into Indian equities.

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Large caps vs mid and small caps: growth will decide

On portfolio positioning, Agarwal said index-heavy leadership could continue if the market remains narrow, as seen last year with banks and IT services. However, he flagged structural moderation in IT earnings growth, returning to a 5–10% range after a brief post-pandemic surge.
“If growth reverts to sub-10%, valuations should also adjust accordingly. Returns will broadly track earnings growth,” he said, suggesting selective opportunities may still exist in mid- and small-cap IT firms with higher growth visibility.

Valuations still rich, but defensible

Agarwal acknowledged that Indian equities trade at 1.5–2 times global valuations across sectors, including banks, cement and steel. However, he defended the premium, citing India’s demographics, scale, aspiration-led consumption, and long growth runway.

“India offers scale and longevity of growth that very few markets do,” he said, adding that in a deglobalising world, companies with strong domestic access deserve valuation support.

Interestingly, Agarwal pointed out that many high-growth sectors from 2024 have seen sharp price corrections despite strong earnings growth, leading to meaningful valuation resets. “Some of yesterday’s growth stocks now look like value opportunities,” he said.

Outlook for 2026

While cautioning that a calendar change alone does not alter market direction, Agarwal said earnings momentum and valuation compression have improved the risk-reward equation in several high-growth segments. If FPIs return and earnings deliver, 2026 could see leadership broaden beyond a handful of stocks.