Investment Strategy for 2026

As we look toward the new year there is a need to remain optimistic especially with respect to India equities. For one, the macro situation is far better than the start of 2025. We had looked at plateauing earnings growth, uncertainty over the tariff situation and a geopolitical situation that threatened to escalate beyond most expectations. Markets indeed took a dive in early months of the year after having reached all-time highs in September 2024.

Global Outlook

The growing unease on AI and its associated hype surrounding valuations of companies is giving rise to the B word. The opinion continues to be divided between investors who feel that AI will indeed change the way we do business going forward, and those who feel that the concept while sound is not appropriately reflected in market capitalizations in the companies involved in the same. This is giving rise to many prominent investors calling for expectations to be tempered and taking measured bets away from the hyped stocks.

US markets and trade policy continues to remain the hot topic of debate, but the economy continues to chug along. With the rate cut announced by the US federal reserve coming at a time that aligns some inflation expectations, the tone of the stance continues to remain cautious. Global markets are flashing confusing signals and investor sentiment remains measured. Retail ownership in equities has been a major feature in the US, and this has led to a wealth effect propelling individual spending and leading to buoyant real estate markets despite a significant rise in interest rates and resultant stress on households.

Japanese 10-year bonds yields have risen substantially and there was some concern that the JPY carry trade impact may suck out liquidity especially from the US markets. However, the absolute increase in yields is still marginal and the higher rates in the US will mean that the carry trade is not dead yet. It is rational to expect that this factor alone is not going to affect liquidity significantly in global markets.

India Outlook

Lackluster performance in the equity markets, weak currency, significant delay in announcing major trade deals, high valuations, massive IPO activity, is causing much concern to investors. All these are being used to indicate that markets are not going to perform, and a sense of despondency seems to have descended. Earnings growth has remained muted at least for the first two quarters of the current financial year and valuation considering the same remain unattractive relative to history.

Yet again behavior trumps logic. The recency effect is at play with equity markets, investors are experiencing a sense of a missed opportunity in precious metals, and indifferent yields in the bond market and a depreciating currency is adding to the gloom. However, the facts paint a difference picture: Consistent upgrades in GDP growth estimates, improvement in the earnings picture, lower interest rates and very low inflation are being ignored.

How should one approach investing in 2026

Remain focused on outcomes – Ask the question – What should your portfolio achieve?

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• Growth in the next few years will remain robust, markets however can remain volatile for various reasons in the short-term events, hence, equities should remain a significant part of overall asset allocation to make the upside of this forecast. Not allowing current sentiment affect investment decisions will be key to ensure this allocation remaining consistent.

• Fixed income and other capital preserving asset classes should remain a feature of the overall asset allocation exercise to counter volatility and protect capital in the interim. However, this should not replace equity allocation

• Diversification into multiple asset classes may seem attractive given their recent performance, but it should be taken in portfolios only if risk tolerance is low, and not for return enhancement. Chasing recent performance often leads to sub-par returns on an average

It is important to revisit goal-based investing. No “one-size-fits-all” recommendation is valid as generally chatter in the markets will lead most investors to believe in the worst case or the best-case scenarios as the sentiment may prevail at that time.

When investing in 2026 a reminder to investors

India is in a secular long term growth stage as an economy. Typically, such economies grow at a positive compound rate over multiple years. The best way to participate is to stay invested over the long term (at least 7-10 years) over this period. Equity exposure should be taken as a portfolio and not individual stocks unless one is a seasoned equity investor

Fixed income investing will provide a great portfolio diversifier for investors adjusting their risk profile. High growth economies typically are starved of capital, and this will keep yields relatively high. Not enough to beat inflation but good enough to smooth the volatility in equities and provide a reasonable buffer for capital preservation.

Ensure liquidity through participation in money market and short-term debt-oriented funds as well as look at tax efficient hybrid portfolios that offer better portfolio allocation tools to investors such as arbitrage funds

Approach commodities, currencies, bitcoin, alternatives and speculative assets with caution and healthy skepticism. Unless one has expert advice that is not motivated by fees or fuelled by current fashion and popularity one is better off avoiding these asset classes altogether. Please be reminded this is not specific investment advice and applies only to generic investors who are encouraged to refer to a qualified financial professional for proper individual advice.