Active investing could have an edge over passive strategies in 2026 as markets become more selective, according to Sunil Sharma, chief investment strategist at Ambit Global Private Client. In an interview, Sharma says wider dispersion in earnings, valuations and sector performance may reward stock selection over index-based investing in the year ahead.
Looking at where we were a year ago, the Fed was actively engaged in QT. As of a couple of weeks ago, the Fed has now embarked on monetary liquidity injections to the tune of USD 40 billion a month, as well as a rate cut cycle. Japan has announced a USD 135 billion stimulus, Germany announced a Euro 500 billion stimulus, and China is engaged in targeted stimulus. Over 90% of the global central banks we track are in accommodative mode.
This time last year, investors were upbeat about a new President in the U.S — one that would end the Ukraine war, bring down prices in the U.S., and was considered pro-growth, pro-business. We all know how that turned out. 2025 has been a tumultuous year, with exceptionally high uncertainty and tectonic shifts in trade.
Domestically, the Indian growth engine sputtered in October 2024, and Indian equities headed into 2025 were in the midst of an economic and market correction. Decisive action by the Indian government has led to meaningful cuts in GST, tax cuts for the middle class, and the government has stayed the course on infrastructure investment. The RBI has delivered helpful rate cuts and liquidity injections. As a result of these measures earlier in the year, a slew of positive news has been coming forward since Diwali, on improved consumer spending, healthy rural, rising incomes and improving credit for small and medium businesses. India has also successfully managed to redirect much of the tariffed U.S. goods to other countries.
Meanwhile, a historic tech wave is underway, with USD 500+ billion in capex investments lined up for 2026, that holds the promise of delivering productivity improvements to enterprises across industries. Finally, India withstood massive selling by FIs, to the tune of INR 2.5 lakh crore since October last year, and that appears to be abating.
So, we think it’s a decidedly improved environment heading into 2026.
The word that comes to mind is resilience. India’s taken the best punch the U.S. could throw on tariffs, redirected trade to other countries, and shown resilience with 8.2% real growth and positive returns on largecap equities for the tenth year in a row, and also positive returns on midcaps. Things can change rapidly once INR 2.5 lakh crore of selling starts receding, new pension fund money finds its way into markets, and initiatives to deepen equity ownership by large public and private initiatives start to take hold.
For Indian equity investors, we expect fundamentals to eventually trump flows as they always do, and the odds are high it will happen in 2026. 2026 looks set to be a decidedly better year than 2025.
Midcaps – despite delivering stellar earnings growth – are up 5-6%, not bad after two years of strong gains of +24.5% in 2024, and +44.6% in 2023. The forward P/E on best-fit forward 12-month earnings is down to 27.8 times. For an index delivering 20%+ growth and revisions up 20% year over year, we continue to believe midcaps are well positioned to deliver attractive returns. As we stated earlier, fundamentals will trump flows.
Smallcaps and microcaps are clear laggards, with -7% and -19% returns YTD. Moreover, smallcap earnings growth and index revisions data aren’t looking great either. We would look to build smallcap exposure via bottom-up, selective, actively managed strategies via experienced, proven fund managers, rather than index-based passive exposure.
Our strong preference – across cap - continues to be actively managed portfolios over passive indices, heading into 2026. We continue to believe stock and sector selection will be widely dispersed again in 2026, and stock selection and sectoral, thematic investing will yield better than market returns.
2026 has the potential to witness the return of inflation, certainly in the U.S. That could create uncertainty and volatility. While we’ve painted a rosy outlook, one must acknowledge a plethora of risks that lurk in the shadows as well, ranging from supply shocks, inflation, disappointment related to the AI trade, a weakening dollar, debt, etc. Until the macro environment turns decidedly favourable, or we begin to witness improving estimate revisions and earnings delivery in smallcaps, we prefer midcaps over smallcaps. Our preference for smallcaps remains bottom-up, active selection.
We prefer attractively valued public and private sector financials, financial services, consumption, autos and auto components, industrials, commodities and IT. We like platform plays in capital markets, as financialization trends are set to accelerate, driven by various private and public initiatives. We like consumption-related new economy plays. We are bullish on consumption – particularly leisure and credit trends. Commodities look interesting, driven by multiple triggers, ranging from monetary easing, a weak dollar, a global race to secure resources, AI buildout, infra upgrades, the threat of inflation and the allure and protection of hard assets. Finally, we prefer midcap IT names active in the AI and leading tech spaces. Finally, we’ve been overweight gold and silver since March 2024 and continue to be bullish on precious metals.
Having said that, we would note that Indian equities, particularly a well-selected portfolio of quality companies with strong business models, earnings visibility, low debt, high ROIC, riding structural tailwinds, have come through one crisis after another and delivered stellar returns consistently. Investors should not let global macro worries deter them from pursuing a long-term, wealth creation strategy that is aligned with their risk and return objectives.