Expert view: Nifty to give muted return in FY26; equities may not outperform bonds significantly, says Bhasin of Ambit

Mint

3 days ago

Expert view on markets: Nitin Bhasin, the head of institutional equities at Ambit, believes the domestic market may give muted returns this year and equities may not significantly outperform bonds. In an interview with Mint, Bhasin shared his views on markets and sectors he is positive about. Here are edited excerpts of the interview:
We are in the phase of rise in stock market concentration, wherein market returns are muted and large-caps outperform mid-caps and small-caps.
This has been the case in CY25TD, wherein large-caps have outperformed mid-caps and small-caps, and we expect this to worsen going forward.
It is time to be selective as FY26 is expected to be a stock-picker's market.
Our GRIP framework (growth, risk premium, inflation and positioning) suggests a weak outlook for equities and asset allocation in favour of bonds.
With earnings growth slowing down (FY26E estimate is one of the lowest starting earnings growth estimates in recent times) and valuations remaining elevated, we do not expect significant outperformance of equities over bonds.
Also, risk premium is increasing due to growth slowdown, whereas a reduction in inflation makes bonds more attractive.
Return moderation can lead to further moderation in developed market flows.
Even if markets remain at current levels, trailing twelve-month returns of Nifty, top mid-cap, and small-cap schemes are likely to remain muted/negative as the base hardens, which can further exacerbate the correction.
While India's structural story remains intact, we are in a cyclical slowdown at the mid-cycle.
Historically, Nifty's earnings estimate trajectory used to be revised downwards each year (nearly 8 per cent), leading up to the financial year, but earnings cuts were minimal in this cycle, which has now begun.
Across all equity cohorts, earnings growth in the second half of the financial year 2025 (H2FY25) was significantly better than that in H1FY25.
However, polarisation in profits leads to polarisation in returns. Aggregate Nifty growth might appear reasonable, but is increasingly being driven by a smaller set of companies.
Broad-based earnings growth in H1FY26 could lead to a bounce in the market, but our outlook remains cautious.
Earnings growth seems to be the key. The government is deploying counter-cyclical tools like repo-rate cuts, CRR cuts, tax relief, and fiscal spending to revive demand and boost growth.
Historically, in periods of rising stock market concentration, defensive positioning, such as FMCG, pharma, and IT, tends to outperform.
Further, in an earnings growth slowdown environment, quality and low volatility factors tend to outperform.
FMCG and IT constitute the bulk of the quality factor's weight and are likely to outperform over the near-to-medium term.
Further, the weight of both sectors in the NSE500 index is nearly 15-16 years low, and we expect mean reversion over the next few quarters.
Defence has long-term structural tailwinds such as rising government expenditure and focus on indigenisation.
However, many defence stocks trade at elevated multiples with little room for near-term upside. For investors with longer horizons, this theme is likely to outperform.
PSU banks will continue to lose market share with demand for retail credit normalising.
We also expect margin pressure to remain higher due to faster transmission of policy rate cuts, which will keep return ratios under pressure.
Be selective in this space, prefer OMCs (oil marketing companies).
Despite macro-economic uncertainty in the US, we recently turned overweight on IT in our model portfolio (Good & Clean) based on three key reasons –
(i) Marginal improvement in S&P500 CY25E revenue growth, which exhibits a strong correlation with tier-1 IT revenue growth.
(ii) IT exhibits strong seasonality, with the bulk of returns (nearly 17 per cent median) generated in the second half of the year.
(iii) IT's weight in the NSE500 index currently stands at nearly 9 per cent, the lowest since March 2009, and we expect mean reversion to manifest.
(iv) IT constitutes the second highest weight in the quality factor, which outperforms in an earnings growth slowdown environment.
SMID (small and mid-cap) profit contribution to the NSE500 universe has significantly accelerated since the pandemic, but peaked at 28 per cent in March 2023.
However, market capitalisation contribution has remained elevated at nearly 33 per cent (all-time high), while PAT contribution currently stands at 26 per cent.
Despite the recent correction, mid-caps and small-caps continue to trade at a significant premium to large-caps and their respective seven-year average multiples.
Flows are also reasonable in SMID schemes.
Moreover, EPS estimates trajectory appears better in large-caps versus SMIDs.
Heavyweight sectors in SMID, such as capital goods and chemicals, have witnessed significant FY26E earnings downgrades in CY25TD.
With expensive valuations and deteriorating earnings growth, divergence appears unsustainable.
We continue to prefer large-caps over SMIDs, and within large-caps, prefer heavy-weights.
We don't expect the SMID valuation premium to sustain as the built-in growth rate is too high.
However, India remains one of the fastest-growing economies and is likely to outperform its emerging market peers over the long term.
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Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions, as market conditions can change rapidly, and circumstances may vary.