In 2025, India broke away from global markets
Speaking to ET Now, Agarwal said Indian markets underperformed their global peers in 2025 despite strong domestic reforms, largely due to heavy FPI selling. While global themes such as defense, renewable energy, electric cars and new technology performed well abroad, many of these sectors saw sharp gains in India, leading to a deviation from global trends.
“Valuations were a concern early last year. That is less the case now, even though India is still not cheap globally,” Agarwal said. Lower global bond yields and a stable rupee could, he said, restore market normalcy and attract venture capital back to India.
A broader market recovery depends on earnings and FPI flows
Agarwal said the pain in midcap and smallcap portfolios stemmed from persistent FPI selling, which triggered selling by HNIs and retail investors, narrowing the market breadth. A turnaround, he believes, will require a combination of strong business results and renewed foreign inflows.
“The second quarter results were encouraging and the third quarter should be better. Markets ultimately follow earnings growth,” he said, adding that improved trade ties between India and the US could act as a sentiment booster for FPIs. Stability in currencies, rather than their levels, is also key to luring hedge funds and global performance-oriented investors back into Indian equities.
Large caps versus mid and small caps: growth will decide
On portfolio positioning, Agarwal said index leadership could continue if the market remains narrow, as seen in banking and IT services last year. However, he noted a structural moderation in IT profit growth, which returned to the 5-10% range after a brief post-pandemic surge.
“If growth returns to less than 10%, valuations should adjust accordingly. Returns will broadly follow earnings growth,” he said, suggesting selective opportunities may still exist in IT companies with larger market capitalization and better visibility into growth.
Valuations are still high, but defensible
Agarwal acknowledged that Indian stocks across sectors, including banking, cement and steel, trade at 1.5-2 times global valuation. However, he defended the premium, citing India’s demographics, scale, aspiration-led consumption and long growth paths.“India offers scale and longevity of growth that very few markets offer,” he said, adding that in a deglobalizing world, companies with strong domestic access deserve valuation support.
Interestingly, Agarwal pointed out that many high-growth sectors have seen sharp price corrections from 2024 onwards 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 will not change the direction of the market, Agarwal said earnings momentum and valuation compression have improved the risk-reward equation in several high-growth segments. If FPIs deliver and earnings deliver, leadership could expand beyond a handful of stocks by 2026.
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