Direct Equities: Stable macro, improving earnings

Domestic Institutional Investors (DIIs) remain steadfast buyers with INR 80k cr. worth buying in Dec, continuing their buying streak for 29 months now. FIIs turned off sellers again in the secondary markets in the last 2 months of Q3FY26, but they continue to invest in primary markets. In Q3FY26, Domestic Institutional Investors (DIIs) bought net equities worth USD 23.1 bn, while Foreign Institutional Investors (FII) were net sellers (USD 4.7 bn) in the secondary market. Cumulatively CYTD, FIIs recorded a net outflow of USD 24.3 bn, which was the highest ever, while DIIs net bought USD 88.4 bn worth of equities. 

Highlights

• We expect the market to give positive returns with elevated volatility around Trump tariff, management commentary post Q3FY26 results declaration and abating of foreign outflows.
• We expect mildly positive returns over the quarter, led by large caps, with mid/small caps also participating in the rally. Our base case forecast pegs Nifty-50/BSE-500 to gain 3%/3% in Q4FY26
• In terms of yield-to-earnings ratio, valuations are still within historical averages, suggesting markets aren't stretched when viewed through a relative lens. Also, given the time correction over the last 1 year, select small caps have become attractive now.
• Sectors: (1) BFSI & IT offer favorable risk-reward balance (2) Selective plays in Metals, Power, Chemicals, Textiles, Disc. Consumption and Realty-proxy sectors (3) Potential tactical plays - Media, Auto, Pharma, US-exposed manufacturing and Telecom (4) On the sidelines –Infra/Energy on the back of growth uncertainty and capital goods, defense, new age tech and FMCG due to scope of deceleration in earnings and punchy valuations.