From Correction to Opportunity: Positioning for Long-Term Gains in FY26

As FY25 concludes and we transition into FY26, the Indian equity market offers a blend of challenges and opportunities. The year has been marked by extremes - Nifty reached an all-time high of 26,277 in September 2024, only to witness a sharp 14 per cent correction, wiping out nearly all its gains from the previous year. This downturn, although unsettling, has created attractive entry points for long-term investors in search of value.

Despite the market correction, domestic institutional investors (DIIs) have continued to provide stability, reflecting confidence in India’s economic trajectory. Mutual fund inflows have remained steady over the past six months, underscoring resilient domestic participation. In contrast, foreign institutional investors (FIIs) have withdrawn nearly `4 lakh crore between April 2024 and February 2025, driven by global factors, including elevated U.S. bond yields. However, with valuations becoming more appealing, FII outflows are expected to moderate and potentially reverse in the forthcoming months.

As we step into FY26, a phased investment approach is recommended - accumulating quality stocks during dips while maintaining a balanced exposure across market caps. Large-Cap stocks, backed by robust fundamentals, should form the core of the portfolio, complemented by selective mid- and Small-Cap opportunities. The broader market is undergoing recalibration after a prolonged bullish phase, and while volatility may persist, India’s long-term growth story remains intact. Investors should focus on earnings visibility, macroeconomic trends, and sectoral rotations to effectively navigate market fluctuations. A historical analysis of investment styles since April 2005 highlights key trends. Stocks exhibiting low-volatility and good quality in terms of earnings have consistently outperformed momentum and value investing during market downturns. While stocks that fit into the value category carry higher risks, they have not delivered superior returns over extended periods compared to low-volatility stocks. Notably, style rotation plays a critical role - extreme underperformance in 2018-2020 was followed by significant outperformance in 2021-2023, emphasising the importance of timing in portfolio adjustments.

Currently, the Nifty 50 trades at 18.1x its one-year forward price-to-earnings (PE) ratio, below its five-year average of 19.4x. On a trailing twelve-month basis, it also remains below its long-term average PE, making valuations compelling. Consensus estimates project a 14 per cent year-on-year growth in FY26 Nifty earnings per share (EPS). While this is a slowdown from the high double-digit growth seen in recent years, it remains robust in a global context.

Understanding the current market dynamics, our cover story in this issue presents an in-depth study of the large-cap index, analysing its return characteristics. Additionally, we have identified large-cap companies with strong financials to assist you in making more informed investment decisions. India’s macroeconomic fundamentals continue to support equity investments. GDP growth is expected to remain in the 6.5-7.0 per cent range, underpinned by political and policy stability. Inflation and currency fluctuations are anticipated to stay within manageable levels, providing a favourable investment environment.

The last two quarters of FY25 saw a significant correction, but it has also set the stage for strategic investing in FY26. Attractive valuations, stable macroeconomic indicators, and steady domestic inflows provide a solid foundation for long-term wealth creation. Investors should adopt a disciplined approach, gradually accumulating quality stocks with low volatility, diversifying across sectors, and leveraging multifactor strategies to mitigate risks.

As always, patience and discipline will be key to unlocking value in the years ahead.

RAJESH V PADODE
Managing Director & Editor