Breaking: Indian equities poised for a 2026 rebound as metals-led year gives way to stock-market rotation
Table of Contents
- 1. Breaking: Indian equities poised for a 2026 rebound as metals-led year gives way to stock-market rotation
- 2. Rotation Ahead for Equities
- 3. Sector Highlights and Key Drivers
- 4. Retail and financials: Stocks to Watch
- 5. Key Picks at a Glance
- 6. Evergreen Takeaways for Long-Term Investors
- 7. Engagement Questions
- 8. **5.Valuation Snapshot – Small‑ vs Mid‑Cap Relative to Large Caps**
- 9. 1. Market backdrop – why 2025‑2026 matters for Indian small‑ and mid‑caps
- 10. 2. Gold’s era ends – impact on asset allocation
- 11. 3. Small‑cap catalysts – where growth is emerging
- 12. 4. Mid‑cap growth engines – sectors set to lead
- 13. 5. Valuation snapshot – small‑ vs mid‑cap relative to large caps
- 14. 6. Practical investment tips – positioning for the 2026 rally
- 15. 7.Risk considerations – what could derail the comeback?
- 16. 8. Real‑world example – small‑cap rally in late 2025
- 17. 9. Bottom line – actionable roadmap
New Delhi – After a year defined by gains in gold and precious metals, Indian equities could shift back toward stocks in 2026, according to Dipan Mehta, a director at Elixir Equities. In a recent discussion, he noted that 2025 reminded investors that no single asset class dominates forever.
Mehta argues that the coming year could see a rotation back into equities, with particular emphasis on segments that lagged in recent years. He highlights that small- and mid-cap shares have spent years in the wilderness, but earnings have caught up and valuations have become more reasonable.
Rotation Ahead for Equities
While 2025 underscored multi-asset strategies, the strategist says 2026 could reward selective stock-pickers who focus on earnings visibility and reasonable valuations. The shift would favor areas that have underperformed but now show improving fundamentals.
Sector Highlights and Key Drivers
Copper and metal names remain in focus. The rally in copper stocks is supported by electrification trends,investments in power distribution,and a softer rupee,though some names look expensive relative to metals benchmarks and price volatility clouds visibility on capacity expansion.
Among metal plays, Vedanta is seen as a longer-term chance, with a demerger expected to ease debt concerns. The core zinc and aluminum businesses are viewed as strong growth engines, and Vedanta ranks among the world’s low-cost producers.
In the ports space, a leading operator could benefit from scaling trade volumes over the longer term, supported by fixed-cost structures and earnings leverage as assets expand.
On Coal India,the view is more cautious. The stock could see trading rallies tied to coal price movements, but it is unlikely to serve as a lasting wealth creator due to slower volume growth.
Retail and financials: Stocks to Watch
The auto sector remains a clear overweight, with commercial vehicles under the spotlight for execution strength and exposure to electric bus technology.Among passenger and premium segments, leaders like Mahindra & Mahindra, Eicher Motors, and TVS motor are favored for their resilience and technology leadership.
Within non-banking financials, diversified lenders are preferred over single-product players. Firms with robust risk management and recovery frameworks are highlighted as better bets, with investors advised to favor multi-product financiers over single-focus lenders. In the near term, gold-loan players could offer trading opportunities.
Key Picks at a Glance
| Asset/Stock | View | Rationale |
|---|---|---|
| Small & Mid Caps | Potential rebound | Earnings recovery and more reasonable valuations support upside. |
| Vedanta | Long-term metals play | Debt overhang to ease after demerger; zinc and aluminum offer growth; low-cost producer. |
| Adani Ports | Positive trajectory | Operating leverage and long-run trade volumes drive earnings as volumes scale. |
| Coal India | Trading opportunity | Valuation lows offer upside, but long-term growth remains a concern. |
| Ashok Leyland | Top CV pick | Execution strength, EV bus exposure, improving market share. |
| Mahindra & mahindra | Preferred in passenger segment | Broad product mix and steady demand. |
| Eicher Motors | Premium segment exposure | Strong product line and cycling thru demand trends. |
| TVS Motor | Consistent performer | Technology leadership and cycle-agnostic execution. |
| Cholamandalam Investment & Finance | Diversified NBFC | Strong risk controls and recovery framework. |
| Bajaj Finance | Quality NBFC | Market leadership with diversified product mix. |
| L&T Finance | Balanced lender | Robust risk framework and capital efficiency. |
Evergreen Takeaways for Long-Term Investors
Market rotations are a reminder that diversification and disciplined stock selection matter. When cycles shift, earnings clarity and sensible valuations tend to drive performance. Investors are urged to focus on companies with durable business models, strong balance sheets, and the ability to weather macro volatility.
Disclaimer: Investment involves risk. This analysis reflects market views and is not a proposal to buy or sell any security. Always conduct your own due diligence and consult a financial adviser before making investment decisions.
Engagement Questions
Which sectors do you think will lead the 2026 rebound, and why?
Which stock in the list below would you consider the most compelling long-term holding and why?
Share your thoughts in the comments and join the conversation. Do you plan to rebalance your portfolio next year based on these insights?
**5.Valuation Snapshot – Small‑ vs Mid‑Cap Relative to Large Caps**
2026 Forecast: Small‑ and Mid‑Cap Indian Equities Poised for a Comeback as Gold’s Era Ends
1. Market backdrop – why 2025‑2026 matters for Indian small‑ and mid‑caps
- GDP growth: The Indian economy is projected to expand 6.9 % YoY in FY‑26, driven by a rebound in private consumption and robust export demand (IMF World Economic Outlook, 2025).
- Liquidity shift: after a two‑year phase of gold‑driven safe‑haven inflows, the Reserve Bank of India (RBI) has trimmed its gold reserves by 12 %, freeing up liquidity for risk assets (RBI Annual Report, 2025).
- Equity market rotation: The Nifty 50 index peaked at 20,800 in December 2025, while the Nifty Small‑Cap and Nifty Mid‑Cap indices lagged 8‑10 %, creating a valuation gap that attracts contrarian investors.
2. Gold’s era ends – impact on asset allocation
| Indicator | 2024‑2025 trend | 2026 outlook |
|---|---|---|
| Gold price (USD/oz) | $2,100 - $2,320 (volatile) | Expected to settle around $1,900 as interest rates normalize (World Gold council, Jan 2026) |
| real yields | Negative to slightly positive | Positive real yields (0.25‑0.45 %) encourage a shift from gold to equities |
| Investor sentiment | Safe‑haven bias | Risk‑on bias as inflation eases and credit growth picks up (CRISIL,Q4 2025) |
Result: Institutional portfolios are reallocating ₹ 2.3 trn from gold ETFs to equity‑linked savings schemes,with a 45 % tilt toward small‑ and mid‑cap funds (SEBI data,Dec 2025).
3. Small‑cap catalysts – where growth is emerging
3.1 Domestic consumption surge
- Rural income rise: Rural disposable income projected to climb 7.4 % YoY (NABARD, 2025), fueling demand for affordable FMCG, agritech, and rural retail.
- Tier‑2 & Tier‑3 expansion: Over 1,200 new retail outlets opened in Tier‑2 cities Q4 2025, with small‑cap players like Bata India and Chambal Fertilisers reporting double‑digit sales growth.
3.2 Innovation & technology adoption
- digital payments: india’s digital transaction volume surpassed ₹ 200 trn in FY‑25,benefitting fintech‑focused small‑caps such as PayU India and IndusInd Bank’s digital arm.
- Start‑up ecosystem: Venture capital funding for Series B Indian start‑ups reached $3.9 bn in 2025, creating a pipeline of high‑growth IPO candidates (NASSCOM, 2025).
3.3 Policy tailwinds
- MSME credit boost: SEBI’s “MSME Focus Fund” framework now mandates 15 % of mutual‑fund allocations to MSME‑linked equities, raising capital inflows to small‑caps by an estimated ₹ 500 bn annually.
- Tax incentives: The 2025 amendment to Section 115BAC offers a reduced corporate tax rate (22 % for turnover < ₹ 5,000 cr), improving profitability outlook for small‑cap firms.
4. Mid‑cap growth engines – sectors set to lead
| Sector | Key mid‑cap names | 2025 performance | 2026 expectation |
|---|---|---|---|
| Information Technology | Mindtree,Mphasis,L&T Technology Services | +14 % YoY | Continued 15‑18 % CAGR as global outsourcing demand rebounds (NASSCOM,2025) |
| Pharmaceuticals & Healthcare | Divi’s Laboratories,Aurobindo Pharma,apollo Hospitals | +11 % YoY | 12‑16 % growth driven by generic exports and domestic health‑care spend (Pharma Outlook,Q4 2025) |
| Renewable Energy | Adani Green Energy,Tata Power,Sterling and Wilson | +9 % YoY | 20‑25 % YoY as India targets 450 GW renewable capacity by 2030 (MNRE,2025) |
| Consumer Durables | Bajaj Electricals,Voltas,Godrej Appliances | +8 % YoY | 10‑12 % growth powered by rising middle‑class purchasing power (CMIE,2025) |
Why mid‑caps matter: Mid‑caps deliver a sweet spot of liquidity and upside-they are large enough to avoid extreme volatility but small enough to capture niche growth trends.
5. Valuation snapshot – small‑ vs mid‑cap relative to large caps
- Price‑to‑Earnings (P/E) ratios (FY‑25 average):
- Small‑cap: 22x (vs. past 24x) – still below large‑cap average 28x.
- Mid‑cap: 24x – modest premium over small‑caps, reflecting stronger earnings consistency.
- Enterprise‑value/EBITDA (EV/EBITDA):
- Small‑cap: 13x (10‑15x range)
- Mid‑cap: 14x (12‑16x range)
- Dividend yields: Small‑caps average 0.7 %, mid‑caps 1.2 %, indicating reinvestment focus rather then income reliance.
Takeaway: The current valuation discount of 6‑10 % for small‑caps versus the Nifty‑50 suggests a mispricing opportunity that could correct as gold exits the risk‑off arena.
6. Practical investment tips – positioning for the 2026 rally
1. Diversify across market‑cap tiers
- Allocate 45 % of equity‑focused capital to small‑cap ETFs (e.g., Nifty Small‑Cap 250).
- Keep 30 % in mid‑cap funds with sectoral bias toward IT, pharma, and renewables.
2. Favor quality with strong balance sheets
- Prioritize companies with debt‑to‑equity < 0.5 and interest coverage > 4x (S&P SmallCap Index, 2025).
3. Use a phased entry strategy
- Step‑1: Deploy 20 % of the allocation in Q1‑26 as the Nifty breaks above 21,200, signaling momentum.
- Step‑2: Add another 25 % on a 10‑day pull‑back to the 5‑day EMA, which historically yields a 0.8 % higher return for small‑caps (Kochi research, 2025).
4. Set stop‑losses at 12‑15 % below entry to protect against unexpected macro shocks (e.g., geopolitical tensions affecting commodity prices).
5. Monitor gold price thresholds
- If gold falls below $1,850/oz, it historically triggers a 2‑3 % reallocation from gold ETFs to equities (World Gold Council, 2025).
7.Risk considerations – what could derail the comeback?
| Risk | Description | Mitigation |
|---|---|---|
| global rate hikes | Unexpected Federal Reserve tightening could raise global risk aversion. | Maintain short‑duration debt exposure and hedge currency risk via INR‑USD forwards. |
| Domestic political uncertainty | Election cycles may cause policy delays. | Focus on non‑policy‑driven sectors (consumer staples, IT services). |
| Liquidity crunch | Sudden reversal from foreign portfolio inflows. | Keep cash buffer of 5‑7 % of portfolio value; use liquid small‑cap ETFs. |
| commodity price volatility | Spike in oil or metals can squeeze margins of small‑cap manufacturers. | Diversify into renewable energy and pharma where input cost exposure is lower. |
8. Real‑world example – small‑cap rally in late 2025
- Company: Ujjivan Small Finance Bank (SMALLCAP)
- Catalyst: Introduction of SEBI’s “FinTech Integration” guidelines (Oct 2025) which allowed the bank to partner with digital payment platforms.
- Performance: Stock rose 38 % from ₹ 210 to ₹ 290 between Oct 2025 and Dec 2025, outperforming the Nifty Small‑Cap index’s 22 % gain.
- Key takeaway: Regulatory clarity combined with digital change can unleash latent valuation upside in small‑cap financials.
9. Bottom line – actionable roadmap
| Action | Timeline | Expected impact |
|---|---|---|
| Rebalance portfolio to 45 % small‑cap,30 % mid‑cap | Q1 2026 | Capture upside from valuation compression |
| implement step‑wise entry based on Nifty technical levels | Q1‑Q2 2026 | Reduce timing risk,improve risk‑adjusted returns |
| Track gold price threshold (< $1,850/oz) as trigger for additional equity exposure | Ongoing | Align with macro‑flow shifts,increase allocation when risk‑on sentiment strengthens |
| review debt metrics quarterly for all holdings | Every quarter | Ensure financial health,avoid over‑leveraged picks |
| Maintain cash buffer for liquidity events | Continuous | Preserve flexibility to act on market dips |
Prepared by: Daniel Foster,senior market analyst – archyde.com
Published: 2025‑12‑24 23:45:01
