Summary
Fundyantra Market Outlook & Investment Strategy: December 2025 (Based on the outlook shared by Mr. Nilesh Shah, Kotak Mutual Fund)
Navigating Global Headwinds and Opportunities
The global economic landscape for 2026 is defined by cooling inflation and increasing fiscal expansion, particularly in G7 economies, where debt-to-GDP ratios are rising. As various governments initiate stimulus schemes, money printing is anticipated globally in 2026. While the US Federal Reserve (Fed) is likely to announce rate cuts, the number of further cuts may diminish over the coming years. Global growth is expected to slow slightly from 2025 levels, potentially leading to a marginal increase in inflation due to base effects
Key Global Risks for 2026: Investors must monitor the escalating US-China conflict over technology, the ongoing debate regarding whether Artificial Intelligence (AI) represents a bubble or a genuine structural shift, the potential return of inflation driven by fiscal stimulus and rate cuts, and the threat of dedollarization. Furthermore, the rise in the 10-year Japanese bond yield (now around 1.93%) could disrupt the yen carry trade
India: Resilience and Moderated Expectations
India stands out as the only major economy that has successfully reduced its debt-to-GDP ratio between the subprime crisis and the COVID crisis. The second quarter GDP growth registered a strong 8.2%, propelled by an all-round performance across consumption, investment, and government spending. We project that India’s GDP growth will exceed 7% for FY26 and moderate to between 6% and 6.5% for FY27. The rural economy is also showing strength due to improving rural wages.
However, the government is committed to fiscal prudence, meaning private sector investment must step up to maintain momentum, especially as capacity utilisation remains positive at around 75%. The Indian Rupee (INR) has depreciated against many major currencies, helping to increase exports to the rest of the world
Equity Market Strategy: Focus on Earnings and Durability
The Indian equity index is near all-time highs, but beneath the surface, many small-cap and mid-cap stocks have fallen significantly (15–20% or more) from their 52-week highs. Foreign Portfolio Investors (FPIs) have been net sellers, partly driven by India’s underperformance compared to other emerging markets and single-digit earnings per share (EPS) growth in the Nifty50 over the last six quarters. Conversely, Domestic Institutional Investors (DIIs) remain consistent buyers.
Our market valuation, compared to the MSCI Emerging Market average, is now roughly in line with historical premium levels. While large caps trade near their historical average valuation (around 21.5 times), small caps remain significantly above their historical average.
The outlook suggests that markets will be rangebound. With limited scope for further valuation rerating, future returns will be primarily driven by earnings growth. We expect earnings growth to rebound in FY27, led by sectors such as telecom, cement, auto, financial services, and chemicals.
Opportunities in Fixed Income and Select Equity Sectors
While caution is required in broad equities, specific opportunities are emerging:
1. Duration Opportunity in Bonds: The bond market appears attractive. India’s inflation is at a multi-decade low, yet the spread between nominal GDP growth and the 10-year G-sec yield is very narrow. This suggests that interest rates (yields) should be lower than they are currently, creating an opportunity in duration or long bonds (10-year plus maturity) for investors seeking better alignment.
2. Indian IT Sector: The IT sector is currently under-owned, with its weight close to a decade low at 10.2%. Historically, periods of extreme under-ownership precede very strong one-year returns. Furthermore, Nifty IT appears significantly cheaper than NASDAQ (22 times trailing P/E versus 38 times). The sector represents an “underowned, underperforming, and fairly priced bet” when compared to potentially overpriced global tech exposure.
Debt and Alternative Assets
Debt Market: Despite rate cuts by the RBI, 10-year and 30-year bond yields have moved up. Market participants are confused by the RBI’s communication, particularly regarding Open Market Operations (OMO), which the RBI states are for liquidity management only, not yield signaling. For high-taxpayers, Income and Arbitrage Fund of Funds continue to be a crucial tax-efficient vehicle, with tax rates dropping to 12.5% after two years, significantly lower than potential slab rates up to 39%.
Gold and Silver: The outlook for precious metals remains positive, supported by consistent central bank buying (approximately 1,000 tons annually), limited mining opportunities, and global geopolitical uncertainty. Silver prices are supported by demand consistently exceeding supply, primarily driven by industrial uses. However, investors must remember that gold and silver lack intrinsic value (no cash flow or dividend); their value is based purely on perception. Therefore, investment in precious metals should always be a restricted component of a well-diversified portfolio
Mutual fund investments are subject to market risks. Read all scheme-related documents carefully
