Daily Voice: Banking sector to lead markets in 2026, says Shailendra Kumar; sticks to underweight call on IT

Shailendra Kumar is the Chief Investment Officer at Narnolia Financial Services

The banking sector is expected to lead the broader market in 2026, according to Shailendra Kumar, the Chief Investment Officer at Narnolia Financial Services. He has maintained an overweight stance on the sector.

"With balance sheet issues now firmly behind us and strong double-digit growth returning, the fundamentals of the sector appear well-positioned for continued outperformance," he said in an interview with Moneycontrol.

On the other hand, he continues to maintain an underweight stance on the IT sector, as he expects it to remain a laggard through 2026.

Do you expect 2026 to be a strong year for the equity markets, with the possibility of higher returns than in 2025?

We anticipate 2026 will mark a significant recovery for Indian equities. The 2025 calendar year saw India rank among the world's weakest major equity markets, with MSCI India delivering modest returns of 3.1% compared to gains exceeding 20% for MSCI World and a robust 27% for MSCI Emerging Markets overall. Such pronounced underperformance by India has been historically uncommon. Encouragingly, the final quarter of 2025 has witnessed Indian markets outpacing global peers, potentially laying the groundwork for strong performance in 2026.

The 2025 underperformance stemmed from a cyclical deceleration in Indian corporate earnings growth, coupled with elevated valuation multiples at year-end 2024. However, these dynamics have now shifted favourably—valuations have moderated, and earnings momentum is gradually recovering. MSCI India currently trades at a 56% premium to MSCI EM, near the lower end of its long-term 45%-90% premium range.

Notably, India has emerged as the world's least volatile major market. Over a five-year horizon, Nifty 50 exhibits the lowest volatility among global benchmark indices, including those in the US. This stability positions India favourably for superior market performance ahead.

Do you think the anticipated rally in 2026 will be driven largely by large caps rather than being broad-based?

We expect large-cap indices to deliver superior returns for the better part of 2026. Current valuations underscore this expectation—the Nifty 100 trades at a reasonable trailing PE multiple of 22.3, whereas the Nifty Small Cap 100 remains elevated at 31.5. This significant valuation premium in the small-cap space will likely need to moderate throughout the first half of 2026 before that segment can transition to outperformance.

What do you see as the key challenges and positive triggers for the markets next year?

A key positive trigger for the Indian market is the expected improvement in earnings, supported by the fact that valuations for the Nifty 50 and several large-cap stocks are now at reasonable levels. Although the Nifty underperformed global markets in 2025, India’s macro fundamentals and corporate balance sheets have remained robust.

As earnings growth normalises, it should serve as a strong catalyst for a market re-rating. Additionally, further reforms and policy measures in the upcoming Union Budget, along with trade deals, could provide incremental momentum to sentiment and liquidity.

Key risk for the market remains the possibility of a global sell-off, given that major international indices are currently trading at elevated valuation multiples. Should such a correction occur, Indian small caps are likely to be disproportionately affected, as their valuations still lack meaningful comfort despite the recent underperformance.

Following the RBI policy meeting, do you believe the rate-cut cycle is largely over, with no rate cuts likely in 2026?

The RBI Governor characterised the current macroeconomic environment as a “rare goldilocks period” during the December 2025 Monetary Policy Committee announcement. The central bank also highlighted that the economy has undergone rapid disinflation. Against this backdrop, we anticipate additional rate cuts in 2026.

Which sectors are likely to lead the markets next calendar year, and which ones could be potential laggards?

The banking sector is expected to lead the broader market. Several large-cap banks have already undergone a 3–4-year period of time correction, and by mid-2025, the Bank Nifty was trading near two-decade-low valuation multiples. We have maintained an overweight stance on the sector since then. With balance sheet issues now firmly behind us and strong double-digit growth returning, the fundamentals of the sector appear well-positioned for continued outperformance.

We continue to maintain an underweight stance on the IT sector, as we expect it to remain a laggard through 2026. Our view is that the muted growth environment the sector is currently facing warrants a valuation reset toward the multiples seen during 2014–17, implying that IT stocks may need to underperform for at least another year before reaching more attractive entry levels.

What is your contrarian bet for 2026?

The pharma, chemical, and entertainment sectors are where we see contrarian value.

Do you think the RBI will allow the rupee to depreciate to its fair value rather than intervening?

The RBI is expected to maintain its stance of containing abnormal volatility in the currency market. Recent measures, including the three-year USD–INR buy-sell swap, are aimed at providing liquidity support rather than defending any specific exchange-rate level.

Why are small-caps underperforming the Nifty 50?

Small caps have underperformed through CY2025, primarily due to the elevated valuation premium they carried over large caps at the end of 2024. We expect this divergence to continue for another 4–5 months, as the trailing twelve-month PE of the CNX Small Cap 100 remains materially higher than that of the Nifty 50.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.