The sharp correction in small- and mid-cap stocks is a normal part of market cycles: PL – Retail Broking CEO

The Budget was reasonably strong from a consumption perspective, but lacked major triggers, which is understandable given the current fiscal constraints. While the proposals were largely growth-oriented, they were not enough to offset the broader macroeconomic headwinds. The ongoing correction in the market is being driven by global factors such as a strengthening US dollar, concerns over slowing economic growth and fading hopes of rate cuts by the US Federal Reserve. The recent trade tariff announcements, while not severe, have contributed to uncertainty. So, safer assets like gold are doing well.

In this backdrop, Indian equities at price-to-earnings (PE) ratio of 21x look expensive. Meanwhile, a China rebound is underway with capital markets recovering. This is drawing FII flows to China while disinvesting in India. Until we see signs of macroeconomic improvement or fresh buying interest, the markets may continue to remain under pressure. However, the long-term outlook remains positive, supported by strong domestic fundamentals and structural reforms.

The sharp correction in small- and mid-cap stocks is a normal part of market cycles and is more pronounced during periods of macroeconomic stress. Historically, these segments tend to suffer deeper drawdowns than large-caps. Negative earnings surprises and a challenging macro environment have amplified selling pressure. Plus, there is a substantial percentage of first-time investors who are experiencing a major market downturn, leading to panic selling.

It is crucial for investors to differentiate between fundamentally-strong companies that can emerge as future leaders and those that have merely ridden the momentum. While it is difficult to pinpoint the exact timing of a recovery, we wouldn’t be surprised at a recovery sometime early this year. Once there is some relief in the US bond yields or a decline in the dollar’s strength, coupled with improving domestic momentum, these segments will bottom out.

The recent underperformance of Indian equities can be attributed to a process of valuation rationalisation, as global investors shift funds to relatively-cheaper markets. With FIIs seeking safer opportunities, funds are being diverted to markets like the US and China, where valuations appear more attractive. We anticipate single-digit to early-teen-digit returns in Indian equities until strong economic momentum re-emerges. The market is expected to trade in the 21,000-26,000 range over the course of the year, depending on macroeconomic factors. Investors should continue to focus on high-quality businesses with strong fundamentals for long-term wealth creation.

While the recent income-tax relief measures provide a marginal boost to disposable incomes, they are not the primary driver of increased retail participation in equity markets. India is on a long-term secular trend towards greater equity market participation, driven by improved financial literacy, access to stock markets and a shift in investor mindset from traditional savings to market-linked instruments. In fact, market corrections often attract new investors over time, as lower valuations present attractive entry points.

The recent restructuring of the personal income-tax regime, which raises the zero-tax slab to ₹12 lakh and rationalises tax slabs, is expected to boost disposable incomes and stimulate discretionary spending. Additionally, rural demand is being strengthened through increased Kisan Credit Card limits, direct farm support and investments in rural infrastructure. The Budget has also introduced measures for gig-economy workers, such as registration on the e-Shram portal, identity cards and access to healthcare, which could benefit nearly 10 million workers. Continued thrust on capex and more money in the hands of people will likely drive a broad-based consumption recovery.

The Budget has been crafted as a bold statement of fiscal consolidation and long‐term structural reforms. The government has not only provided for 10 per cent increase in capex, but Central schemes such as PM Awas, Rural Drinking Water and Solar Rooftop scheme have seen sharply higher allocations than FY25RE. The capital goods and infrastructure sectors are expected to benefit from increased government spending on public projects, while the renewable energy sector presents investment opportunities in solar, wind and green hydrogen, aligning with the government’s energy transition goals. Additionally, the consumer sector, both staples and discretionary, should see positive momentum due to higher disposable incomes and improved rural demand. Apart from these, we are positive on sectors such as Travel and Tourism, EMS, Hospitals and Pharma, and select auto stocks.