Year-End Market Review and 2026 Outlook

Global and Market Context

Global financial markets closed 2025 on a broadly constructive note, supported by resilient economic growth across major economies and a gradual normalization of inflationary pressures. While central banks in developed markets maintained a cautious policy stance, expectations of a more stable interest rate environment contributed to improved investor sentiment toward risk assets during the latter part of the year. Within this global backdrop, Indian equities continued to demonstrate relative resilience, supported by strong domestic liquidity, improving corporate earnings visibility, and sustained structural growth drivers across several sectors of the economy.

However, by the end of 2025, valuations across several segments of the market—particularly mid- and small-cap stocks—had expanded significantly, prompting investors to adopt a more selective approach toward equity allocation. Despite these valuation considerations, the long-term investment case for India remains supported by favourable demographics, increasing domestic financialization of savings, and continued improvements in corporate balance sheets and governance standards.

Market Overview

Indian equity markets ended December on a relatively stable footing, capping a year characterized by strong participation from domestic investors and sustained corporate earnings growth. Large-cap indices remained supported by institutional flows and earnings visibility, while mid- and small-cap stocks continued to outperform during much of the year, reflecting strong retail participation and optimism toward domestic growth sectors. Sector performance during the month reflected continued investor interest in cyclically sensitive areas of the market, including financials, automobiles, and select industrial segments.

At the same time, market participants became increasingly attentive to valuation dispersion and potential normalization across segments that had experienced rapid price appreciation during the year.

Key Market Developments

Elevated Valuations in Broader Markets

One of the defining themes toward the end of 2025 was the continued expansion of valuations across mid- and small-cap stocks. Strong retail participation and robust domestic liquidity flows supported price momentum across several segments of the market. While such periods of strong performance often reflect improving fundamentals, they can also lead to temporary valuation dislocations, reinforcing the importance of disciplined security selection.

Strong Domestic Liquidity Support

Domestic institutional investors continued to play a central stabilizing role in Indian equity markets throughout 2025. Systematic investment plans (SIPs) and broader domestic savings flow into equity mutual funds remained robust, helping offset periodic volatility in foreign capital flows. This structural shift toward greater domestic ownership of financial assets has increasingly reduced the sensitivity of Indian markets to short-term fluctuations in global investor positioning.

Currency Stability

The Indian rupee remained relatively stable through December, reflecting balanced capital flows and the support of foreign exchange reserves. While currency movements remain an important consideration for foreign investors, the broader macroeconomic environment remained supportive of financial stability.

Market Performance and Internals

Indian equity markets ended December with moderate gains, reflecting continued institutional participation and supportive earnings expectations. The Nifty 50 gained 2.1% while the Sensex rose 1.8% during the month. Market volatility remained relatively subdued during December, reflecting stable investor sentiment and the absence of significant macroeconomic shocks. The India VIX remained near historically moderate levels, suggesting that market participants were largely constructive on the near-term outlook for equities.

Sector Performance: PSU Banks led with +6.2% returns, followed by Metals at +3.8%, Automobiles at +2.7%, Healthcare at +1.5%, and Oil & Gas at +0.9%. Financials and cyclically sensitive sectors remained among the stronger-performing segments, supported by improving balance sheets, credit growth, and operational leverage.

Institutional Flow Dynamics

Institutional flows continued to play an important role in shaping market behaviour. While Foreign Portfolio Investors (FPIs) remained selective in their allocations toward emerging markets, Domestic Institutional Investors (DIIs) continued to provide strong liquidity support. Robust domestic flows into equity mutual funds—particularly through systematic investment plans (SIPs)—helped sustain demand for equities and contributed to the resilience of Indian markets during periods of global volatility. This evolving market structure highlights the increasing importance of domestic capital in driving equity market dynamics in India.

Portfolio Positioning

Our portfolio positioning continues to emphasize sectors where structural growth drivers and improving industry fundamentals align with attractive long-term opportunities.

Automobiles: The automobile sector remains supported by improving demand conditions, ongoing product innovation, and favourable operating leverage across manufacturers. Premiumization trends and improving rural demand dynamics continue to provide a constructive outlook for the sector.

Metals: Exposure to select metal companies reflects improving balance sheets, disciplined capacity expansion, and supportive industry supply dynamics.

Financials: Financials remain a core portfolio allocation, supported by strong credit growth, improving asset quality, and enhanced capital adequacy across leading institutions.

Our investment approach emphasizes long-term fundamental strength rather than short-term market momentum, with careful attention to factor exposures, correlations, and valuation discipline.

What We Are Watching in 2026

As we move into 2026, several factors will remain important in shaping market outcomes:

• Global monetary policy trajectory: Investor sentiment toward emerging markets will remain sensitive to the policy outlook of major central banks.
• Valuation dispersion across market segments: Elevated valuations in certain segments of the market may lead to increased selectivity among investors.
• Domestic liquidity trends: Continued growth in domestic financial savings will remain an important driver of equity market stability.
• Corporate earnings momentum: Sustained earnings growth will be a key factor supporting long-term market performance.

Closing Perspective

Indian equities concluded 2025 supported by strong domestic liquidity, improving corporate fundamentals, and favourable structural growth drivers. While elevated valuations in certain segments of the market warrant careful monitoring, the long-term outlook for Indian equities remains constructive. Periods of market consolidation often provide opportunities for disciplined investors to identify high-quality businesses with sustainable competitive advantages and attractive long-term earnings potential.

Our investment philosophy remains focused on consistent generation of risk-adjusted alpha, supported by rigorous research, disciplined portfolio construction, and continuous monitoring of evolving market dynamics.