Nifty May Stall, But These Sectors Could Soar In FY26; Stock Pickers – Are You Ready?

For FY25, the Nifty 50 has delivered an absolute return of approximately 5%, with most of these gains concentrated in the month of March on the back of oversold stocks stabilizing the flow.

The time frame between September 2024 and February 2025 saw significant turmoil, with one of the deepest market corrections in recent years and an approximately 16% decline in Nifty during this time frame. The midcap segment experienced an even bigger magnitude of downturn, with the Nifty Midcap 100 index correcting from ~61,000 levels to around ~48,000 levels, a steep 17-18% decline.

However, individual stock meltdowns were even bigger, with the majority of the midcaps dropping over 40%. However, from the bottom markets have rebounded in March with respect to indices as well as midcaps and smallcaps. From the bottom, the majority of the stocks have gone up by at least 15% to 20%. After this rebound in March, the key question is: What lies ahead for FY26? Let's find the answer based on an interview with Hemant Shah, Fund Manager at Seven Islands PMS.

Has The Market Formed A Bottom?

The bottom has likely been formed, but it could be retested within the current financial year. Will Nifty reclaim its previous highs? This is the biggest question in the current financial year. It is unlikely for at least the next 9-10 months. A decisive market turnaround is expected only in H2FY26.

Where Should Investors Focus?

Over the last six months, sentiment has swung from extreme optimism till September 2024 to extreme pessimism in January and February 2025. Now, March stands at a realistic level. Given current valuations, investors should focus on India-centric sectors, where valuations remain fair. PSU banks have good return potential for the investors, supported by strong capital adequacy, strong balance sheets, good profit metrics, and attractive price-to-book ratios. Keeping all this in mind, the risk-reward ratio seems favorable for investors. With limited downside risk, these PSU banks present a compelling opportunity at the moment.

The second sector investors should look at is the infrastructure space with an emphasis on both large and small infrastructure companies. For projects that have been awarded till FY25, strong execution is the key, and FY26 is the year of strong execution, followed by good growth in terms of profitability and hence, companies in the infrastructure space having a good balance sheet should be kept on your radar. Expect strong revenue and profit growth, especially since this sector remains insulated from global turmoil and tariff wars.

The third sector is Contract Development & Manufacturing Organizations (CDMO) in pharmaceuticals. Despite recent volatility, this remains a sector to watch out for.
However, it's too early to recommend the sector broadly in the light of tariff uncertainties.

Macroeconomic Outlook

There are no adverse factors in India's growth story besides a temporary slowdown. The growth is likely to pick up in FY26 on the back of GDP forecast at 6.4% for FY25 and 6.5% for FY26 by the EY Report. Hopefully, with a normal monsoon, GDP growth can be revised upwards going forward. Additionally, an interest rate cut of 25 bps (potentially in April) could provide further support amid global uncertainties.

Tariffs and Global Market Performance

Global Indices Changes In FY25

Despite only a 5% gain in Nifty50 for FY25, India's market performance is in line with global benchmarks. India has not extremely underperformed vis-a-vis DOW (+7.3%), but vis-a-vis Hong Kong (+40.25%) and DAX100 (24.92%), Nifty 50 has underperformed with a wide margin.

When it comes to tariffs, only time will reveal the exact rates and their implications. Broadly, the recent 25% tariff imposition is on the steeper side however, tariffs will be rolled back to a reasonable level within the next two to three quarters.

There was an underperformance of Nifty50 due to the aggressive FII selling. Foreign investors remain valuation-conscious, explaining their previous selling activity. While we are seeing renewed buying, sustained FII inflows remain uncertain and will likely be on-and-off.

What is your opinion on the mid-cap and small-cap segment?

Stock picking is the name of the game. Many stocks have corrected by ~30%-40%. However, investing opportunities in challenging situations, such as picking up the right stocks at the right valuations, will yield superior returns even in a challenging FY26.
For investors, the approach should be simple: Ask three key questions before investing:

1. Are valuations reasonable?
2. Is there strong growth and earning visibility?
3. Can the stock price surpass its previous high?

If all three conditions are met, then the investment will yield supernormal returns. But the challenge is how to identify this outperformance. This is what we are here for based on our strong experience, research, and wide availability of data. We, as fund managers, have a better chance to identify this opportunity.

It is anticipated that FY26 will necessitate a focus on individual stock selection; however, India's long-term growth story remains strong, as periods of challenge frequently present unique investment opportunities.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.