The markets are at an intersting crossroad. On the one hand the Nifty and Sensex scaled new highs but the small and midcaps seem reltively muted. The activity in the IPO market also picked pace with $25 billion raised through IPO and QIP issuances so far in 2025. However, the returns on benchmarks remained subdued, with FPIs being net sellers. But here’s some good news for investors. Kotak Mutual Fund expects double digit earnings growth in FY27.
According to the 2026 market outlook by Kotak Mutual Fund, the Nifty earnings recovery is likely to begin in the second half of FY26 and is expected to 11% YoY imprivement. Overall earnings growth is projected to recover in FY27.
Kotak Mutual Fund on India’s valuation: Growth in MSCI India Index EPS
India’s valuation relative to its Emerging Markets peers have been under the radar and is seen as a key reason for the muted FII participation in the market. But that’s probably changing. The MSCI India Index valuation is currently near its historical average Price-to-Earnings (PE) premium over Emerging Markets (67% current premium versus 63% average). Kotak Mutual Fund expects the MSCI India Index EPS growth to be 16 in FY27, rising from 10 in FY26. They believe that India is likely to offer value versus China. In terms of index pricing, the Nifty is trading close to its long-term average P/E, while the Nifty Smallcap 100 Index is trading at a significant premium, the report pointed out.
Kotak Mutual Fund on FII and DII trends
Moving ahead, the Kotak Mutual Fund report highlighted the “Tug Of War Between FPI & DII”. The Foreign Portfolio Investors (FPIs) have been net sellers in 2025 so far, leading to a dip in their overall holding of Indian equities.
Many factors contributed to the fall in FPI selling, which include negative returns in the last year, underperformance relative to emerging market peers, single-digit EPS growth over the last five quarters, and a valuation premium compared to peers. However, the Domestic Institutional Investors (DIIs) have helped offset FPI selling.
But Kotak Mutual Funds expects that to change in the new year. FPIs are projected to be buyers in CY 2026. A higher Return on Equity (ROE) than peers and long-term growth potential are likley to be the key catalysts bringing about this change in trend.
Kotak Mutual Fund: Key sectors to focus on
A look now at the key sectors that Kotal Mutual Funds expects to be growth drivers –
Financial Services
The sector has seen steady improvements in asset quality and profitability over the past few years. Credit growth has started to pick up, resulting in an increase in the Credit-Deposit (CD) ratio. Kotak MF, in its report, highlighted that banks are expected to lead the earnings recovery in FY27.
Automobile Industry
Rural income per capita has surpassed the $2000 mark, considered a starting point for consumption takeoff. The consumption upcycle is driven by rising per capita income, leading to greater discretionary spending.
The report said that the Auto sector is a strong play on rising discretionary spending due to low penetration rates in both two-wheeler (2W) and passenger vehicle (PV) markets compared to Asian peers and global markets.
Healthcare Industry
The healthcare industry is positioned for long-term structural growth. This growth is supported by a population mix shifting towards older age groups ( over 30 years). India’s old-age population is projected to double over the next 25 years.
E-commerce
The e-commerce sector has a consolidated market structure but currently has low penetration, giving a massive runway for growth.