Direct Equities: Value emerging in several pockets amid uncertainty

May 2026 highlighted a clear divergence in Indian equity markets, with large caps under pressure while mid- and small-cap segments showed resilience and continued investor interest. The Nifty-50 declined 1.9% amid global uncertainty, particularly around US-Iran developments, while FIIs remained net sellers, albeit at a slower pace, taking cumulative CYTD outflows to record levels. Globally, emerging markets like Taiwan and South Korea outperformed significantly on the back of the AI-driven rally, reshaping market rankings and reducing India’s relative standing, with Taiwan, even with a much smaller GDP, gaining outsized weight in global indices led by semiconductor giant TSMC.
 

Highlights

• Resilience despite headwinds: While geopolitical concerns and FPI outflows weighed on headline indices, mid/small caps and strong domestic flows highlighted underlying market strength.
• Earnings support intact: Nifty-50 delivered ~6.6% YoY earnings growth in 4QFY26, anchoring the market despite macro uncertainty.
• Macro risks vs structural growth: Inflation, crude prices, rupee weakness and El Ni?o remain near-term concerns, but valuations and earnings recovery expectations support the long-term growth story.
• Key monitorable: Monsoon/El Ni?o, US-Iran developments, inflation & RBI policy, FPI flow reversal, and government policy/tax changes.
• Valuations & sector view: Nifty valuations are near long-term averages; constructive stance on mid/small caps due to earnings outlook. Preferred sectors include Consumption, Banks, IT, with selective opportunities in Auto, NBFCs, Power, Pharma and tactical plays in PSUs, Energy, and Healthcare.