Smallcaps may see more pain in 2026; Nifty target at 30,548: Vikram Kasat

Mid-caps are poised to lead over large- and small-caps in 2026, driven by double-digit FY27 earnings and FPI inflows, though outperformance margins may narrow, said Vikram Kasat of PL Capital

It has been a topsy turvy ride for the markets, so far, in December with benchmarks struggling to hold record high levels. In an email interview, Vikram Kasat, Head-Advisory at PL Capital, tells Nikita Vashisht that profit booking by retail investors, and high leveraged trades are some of the reasons why markets are moving sideways. Edited excerpts:

Why are the markets unable to hold record high levels?

There are several factors contributing to this disparity.

 

Retail selling: Foreign Institutional Investors (FIIs) have been relatively subdued in their selling over recent weeks. However, retail investors, who predominantly hold small and mid-cap stocks, have turned into net sellers. Data from NSE India reveals sustained retail selling pressure of approximately ₹13,776 crore in October and ₹11,544 crore in November, weighing heavily on the broader markets.

 

 

Rising leverage amplifying volatility: Margin Trading Facility (MTF) borrowings have surged sharply over the past six months -- from ₹68,000 crore in March to ₹1.12 trillion currently. This increased leverage means that when stock prices decline, brokers may trigger forced liquidation if additional collateral isn’t provided, further accelerating downward moves.

 

Stock-specific setbacks: High-profile stocks that had seen multi-fold gains over the past five years -- such as InterGlobe (due to pilot concerns) and Kaynes Technology (amid regulatory queries) -- have experienced sharp 20–40 per cent corrections within weeks. Sudden declines in such widely held 'darling stocks', understandably, dampen confidence across the mid and small-cap space.

What are your Nifty 50 targets for 2026 in bear, base, and bull case scenarios?

In base case, we value Nifty at 15-year average price-to-earnings (P/E) at 19.2x, with September 2027 EPS of ₹1,515, and arrive at a 12-month target of 29,094 (28,781 earlier).

 

In our bull-case, we value the Nifty at P/E of 20.2x and arrive at a target of 30,548 (30,220 earlier). In bear case, we see Nifty at a 10 per cent discount to long-term average with a target of 26,184 (25,903 earlier).  ALSO READ | Bulls can take Nifty 24% higher to 32,032 levels by Dec 2026: Kotak Sec

What is your earnings outlook for H2FY26 and FY27? Which sectors can lead the recovery, and which ones can puncture the momentum?

We remain overweight on Banks, Healthcare, Consumer, Auto and Defence, and underweight on IT services and commodities.

 

We expect growth to pick up in domestic consumption and increase weights on Banks, NBFC/Insurance and Ports. We retain overweight on Consumer, Auto, Healthcare and Capital Goods, although we tinker with weights.

FIIs have sold over ₹1 trillion in 2025, while DIIs have pumped ₹6 trillion. Yet markets have struggled to generate meaningful returns. Does this mean FIIs' hold over Indian equities still remains strong despite the rising retail/DII participation?

FIIs' influence on Indian equities has weakened notably in 2025, as their ownership has fallen to around 16.7-16.9 per cent -- a 13-15 year low. DII ownership, meanwhile, has risen to a record 18.3-19.2 per cent in NSE-listed companies. We don't think FIIs' hold dominates the market anymore. Rather, rising DII/retail participation (via mutual funds, insurance) has made markets more self-reliant and resilient to FII outflows, reducing their directional sway despite poor returns from other factors.  ALSO READ | Nifty could outrun S&P in 2026, mirror earnings growth: Amish Shah, BofA

Where do you see the best risk-reward opportunities (stocks/sectors) at current levels?

Mid-caps are poised to lead over large- and small-caps in 2026, driven by double-digit FY27 earnings and FPI inflows, though outperformance margins may narrow. Small-caps, down 7-9 per cent in 2025 after prior surges, risk further correction due to stretched valuations, moderate earnings, and thin liquidity, suggesting no quick bounce.

How should long-term investors balance portfolio allocations between defensives and cyclicals in 2026? Any dark horses?

Long-term investors should tilt 60-70 per cent toward defensives like IT, FMCG, and utilities for stability amid patchy growth, with 30-40 per cent in cyclicals such as financials and autos to capture re-rating on credit uptick and rural recovery.

 

Sector rotation -- shifting from defensives during contractions to cyclicals in expansions -- enhances returns when balanced with diversification across 2-3 cyclical sectors. PSU banks emerge as dark horses, poised to lead 2026 after multi-year consolidations, offering cyclical upside with improving asset quality.

Is it time to look at commodity-related stocks as a strategy for 2026?

Investors may allocate 7-12 per cent in commodities by blending Nifty Metal Index (4-6 per cent allocation) with global ETFs like COPX. This will minimize forex risk via rupee-hedged funds. Investors may also rebalance their portfolio quarterly against Nifty 50 for low correlation.