Aditya Birla Sun Life AMC expects equity returns in 2026 to be broadly in line with the previous calendar year, at around 10–12%, and believes large-cap stocks are better positioned at this stage of the cycle, as the phase of indiscriminate outperformance in small and mid-caps is behind.
The AMC said that while the rupee could pose a short-term challenge, it represents a long-term opportunity. A trade deal, it added, would help arrest excessive currency depreciation and could act as a trigger for renewed foreign institutional investor (FII) inflows. It mentioned that investors could have a better experience this year, supported by a turnaround in sentiment, improving earnings breadth and momentum, continued strong domestic liquidity, prospects of a return of foreign portfolio investor (FPI) flows, and valuations that are more compressed than last year.
Currency Stability: The Missing Piece for Foreign Capital
The AMC said its focus has shifted towards compounder sectors, with IT, FMCG and materials expected to be potential dark horses. Speaking at the company’s annual market outlook, Harish Krishnan, co-chief investment officer and head of equity investments, said: “The current market capitalisation of India is at about 3.6% of the world market cap, and it presents a wonderful opportunity for foreign long-term allocators of capital, the only thing they have to wait for is when the rupee is going to stabilise, that is where they are losing most of there sleep on rather than their equity value.”
“As and when trade deal does get announced, we are going to see a flurry of foreign investor money to India,” he added. It noted that the profit pool of the top 1,000 listed companies has grown 11% year-on-year, while market capitalisation has risen only 6% as of November-end. This, it said, increases the likelihood of new market highs this year, driven by stronger earnings growth, lower rupee depreciation and new listings.
Krishnan added that the aspect really is that which part of the market is likely to capture the upside because a lot of money seems to have gone into areas, sectors, and themes which played out wonderfully from 2020-24 but not necessarily moved to the new themes.
Navigating the Overcrowded ‘Small-Cap Bus’
He noted that the share of MF ownership in top 100 significantly lower than profit pool share of top 100 and said that there has a significant amount of money that has been chasing small caps in the last 2-3 years. “Even though the earnings may come through, that bus seems to be a lot more overcrowded, which is why we have the view that there is greater opportunity in the larger set,” he said.
From an asset allocation perspective, the AMC said domestic equities remain attractive relative to other asset classes, while fixed income is likely to provide stability as the interest rate cycle turns more favourable. “Overall, 2026 is not expected to be a straight line, as geopolitics, trade concerns and currency movements continue to pose real risks,” it said in a press note.