Stock-specific opportunities will matter more than market-cap trends in 2026: Axis MF’s Shreyas Devalkar

After a year in which broad indices delivered uneven returns, Indian equities are entering a phase where selectivity will be more important than top-down positioning. Shreyas Devalkar, Head–Equities at Axis Mutual Fund, says valuation dispersion across sectors and stocks has widened, making bottom-up stock selection more relevant than market-cap-based allocation. In an interview with Moneycontrol, he shares his views on valuations, earnings, sector positioning, flows and key risks.

Edited excerpts:

Does the underperformance of Indian markets last year still create an overhang going into this year?

A large part of that underperformance has already played out through valuation correction. Because of the underperformance, India’s valuation premium over emerging markets has come down sharply. At its peak post-COVID, India was trading at nearly a 100% premium, whereas today it is closer to its 10-year average of around 60–65%. Pre-COVID, this premium was closer to 50%.

Large-cap valuations are now only about one standard deviation above long-term averages, while mid- and small-cap valuations remain about two standard deviations above. So, despite the underperformance, especially in small caps, valuations are still elevated.

What we are seeing is both valuation correction and earnings normalisation happening simultaneously. A part of this correction is likely already done, and this should help the market.

Which sectors are currently priced to perfection?

There are several sectors where strong growth themes are already fully reflected in valuations. In these sectors, stocks are priced so well that it becomes difficult to generate returns unless there is a clear earnings upgrade.

This is visible across multiple areas such as defence, EMS, hospitals, travel, transportation and other thematic growth segments. The theme itself is strong, but the scope for valuation-driven upside is limited at current levels.

Sectors like construction materials, electric utilities, pharmaceuticals, oil & gas, and metals & mining have seen valuation re-ratings of 30% to 67% versus pre-COVID levels, with electric utilities P/E rising from 11.8x to 19.9x, construction materials from 20.9x to 40.8x, and pharmaceuticals from 23.7x to 29.1x.

Even Nifty midcaps and smallcaps, despite underperformance last year, continue to trade at premiums of roughly 30% and 18% to Nifty 50, highlighting that many popular growth themes are already well-priced. As a result, further upside will depend primarily on earnings delivery rather than multiple expansion.

Which segment will be more in focus – large caps or SMID Caps?

Market-cap-based allocation alone may not be very effective. Going forward, opportunities will be very stock-specific rather than driven by broad market-cap trends.

How do you see the earnings outlook in FY2026?

It is important to separate GDP growth from Nifty EPS growth. While there is a correlation, they are not the same. Consensus EPS growth for FY26 has come down to the mid-single digits, largely because of pressure on banks due to margin compression and slower growth in sectors like IT.

FY26 growth has been more skewed and sector-specific. For FY27 and FY28, consensus expects mid-teen growth, which is likely to be broader-based across sectors such as financials, autos and others.

Why is BFSI being seen as a preferred sector in this environment?

BFSI stands out because valuations have not re-rated significantly compared to other sectors. To make money in the market, valuation comfort is important.

The key triggers to watch are improvement in credit growth and continued stability in asset quality. Recent data suggests credit growth is picking up, and asset quality trends have remained stable without negative surprises.

How do you view the auto sector at this stage?

The trend of premiumisation is expected to continue across both two-wheelers and four-wheelers. As per-capita liquidity increases, demand naturally shifts toward higher-end variants.

This is already visible in sales data, where higher variants are selling more than entry-level models. This pattern is unlikely to change.

What is your view on defence as an investment theme?

There is no doubt about the structural tailwinds for defence, given rising global and domestic defence spending. However, the key issue is valuation.

This applies not only to defence but also to other high-growth themes such as EMS and healthcare. While growth visibility is strong, returns from current valuation levels are likely to be restricted unless earnings surprise positively.

What could trigger a return of FII flows into India?

One major trigger could be the global AI trade, which has disproportionately benefited US markets. At one point, Nasdaq and Nifty were trading at similar valuations, but now Nasdaq trades at a much higher multiple while Nifty is around 24 times earnings.

If there is even a partial reversal of this trade, flows could return to markets like India that underperformed during this phase. Additionally, rupee depreciation has made Indian assets relatively more attractive for foreign investors.

Is the long-awaited consumption recovery still expected this year?

The expectation remains, but the key factor to watch is continuity. Consumption momentum beyond the festive season will be critical, especially the January to March period.

On the investment side, there are already strong pockets of activity in areas like semiconductors, energy and data infrastructure. On the consumption side, multiple triggers are in place, including ample liquidity, easing interest rates, GST cuts, MSME support and proactive regulatory measures.

What are the key risks investors should watch out for?

One major risk is the rise in inward-looking policies globally, which can hurt export growth. Trade-related uncertainties, especially tariff-related issues with the US, remain a concern.

While relative valuations have improved, absolute valuations in India are still high. Any disruption to equity flows could therefore have an outsized impact.

Do you have a target for the Nifty or Sensex by year-end?

Market returns tend to align closer to long-term averages rather than GDP growth. It is important to maintain realistic expectations and focus on fundamentals.

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