What Lies Ahead for Equity, Debt & Gold in 2026 and the Strategy to Follow

The year 2025 has been an eventful one with both positive and negative factors.

Here is a recap of the major events...

• The inauguration of the Trump 2.0 administration on 20 January 2025
• The protectionist policy announcements, particularly on trade tariffs and the tightening of visa rules
• India-Pakistan military conflict (from 6 May to 10 May) after the deadliest militant attack on tourists in Kashmir
• Israel targeted Iran's military and nuclear sites in June
• The Russia-Ukraine war continued
• The US government faced a shutdown for the first time in seven years (from 1 October to 11 November, as the temporary funding bill could not pass the Senate amid resistance from the Democrats)
• The global economy faced uncertainty, and financial markets were volatile
• Most major central banks resorted to policy rate cuts to support growth (despite inflation risk in some economies)
• The total global debt rose to US $ 111 trillion (t) in 2025, approximately 94.7% of global GDP, up from 92.4% in 2024.
• The primary market, despite the negative events, seemed resurgent with a 39% increase in IPO proceeds globally compared to 2024, as investors took risks to build wealth
• The Union Budget of the Modi 3.0 government increased the base exemption limit to Rs 1.2 million (m), leaving higher disposable incomes in the hands of common citizens (for investment and consumption)
• The Modi 3.0 also rolled out GST reforms, providing a fillip to India's consumption story
• The government of India also increased the capital expenditure (capex) on infrastructure in the Union Budget by 20%, signalling a continued commitment to building roads, railways, and ports, which benefited industrial and capital goods stocks.
• Corporates also spent a massive amount on capex to build the AI infrastructure, resulting in an AI boom
• The above-normal monsoon in 2025 boded well for India's economy, particularly for sectors linked to agriculture, such as fertilisers, tractors, horticulture, agri-tech (drones and agri-data analytics, AI), food & food processing, etc.
• Domestic institutional investors and retail investors continued to support the Indian markets amid the financialization of savings.

Equities

Against this backdrop, Indian equities have posted a modest 9.5% absolute return so far in 2025. In contrast, the global peers have fared far better.

Performance of Key Equity Markets in 2025

Index	% YTD Change in 2025
BSE Sensex (India)	9.5
CAC 40 (France)	10
DAX (Germany)	22
FTSE 100 (U.K.)	20.7
Hang Seng (Hong Kong)	28.6
Nikkei 225 (Japan)	26.3
RTS Index (Russia)	20.8
S&P 500 Index (U.S.)	16.9
Shanghai Composite (China)	16.9

Data as of 22 December 2025
Source: ACE MF

Having said that, the Indian equity market scaled a new lifetime high (of 86,159.02 on the BSE Sensex on 1 December 2025).

The smallcaps and midcaps, after scaling their lifetime highs back in 2024, slowed a bit this year.

During the initial months of the year, due to macroeconomic and geopolitical uncertainty, they fell much more than largecaps.

And even in the recovery phase, they lagged compared to largecaps. The largecaps demonstrated their trait of stability and have been clear winners so far in 2025.

Sector-wise, banks - particularly the PSU banks - NBFCs, automobiles, infrastructure, and metals were among the best performing sectors, while media & entertainment, IT, and realty were among the worst performing ones.

Why have Indian Equities Underperformed?

The reason for Indian equities underperforming this year is mainly due to lofty valuations. It's also why foreign portfolio investors have dumped Indian equities and look at other markets whose valuations seem better and promising.

A fact is that India is commanding a premium compared to its global peers. The Morgan Stanley Capital International (MSCI) India Index trailing PE is at 27, higher than the MSCI Emerging Markets Index and MSCI World Index trailing PEs, which are around 17 and 24, respectively.

Even on a 12-month forward PE, the MSCI India Index, with a PE of nearly 23, is higher than the other emerging markets PEs and the world, which are around 13 and 20, respectively.

India's market cap-to-GDP ratio, famously called the Buffett indicator (named after legendary investor Warren Buffett), is also at 143.7%, a significantly overvalued zone.

The way forward for Equities in 2026 and the strategy to follow

In 2026, the headwinds for Indian equities emanate from protectionist policies of the Trump 2.0 administration and geopolitical tensions.

The depreciating Indian rupee is also a matter of concern. It was Asia's worst performer in 2025.

Corporate earnings would be the key for the Indian stock market going forward. There is general optimism about the earnings for 2026-27, with expected 16% YoY growth. But it's important not to get carried away.

Also, keep in mind that India's long-term economic prospects are bright. However, there isn't always a direct correlation between that and the stock market, as companies go through cycles. You need to be very selective and careful.

Don't base your investment decision on past returns, which may not necessarily repeat in the future. Do remember that for every level of risk you seek, there is risk involved. Benjamin Graham, the father of value investing, has famously said, "The essence of investment management is the management of risks, not the management of returns."

Make sure you have exposure to largecaps in your core equity portfolio. The PE of the largecap index is around 23, a tad below the 5-year average. Largecaps can offer better stability if the market turns volatile going forward.

Having emphasised investing in largecaps at the current juncture, if you have a very high-risk appetite and have an investment horizon of 7-8 years or more, small and midcaps can be considered for your satellite portfolio with a sensible asset allocation.

The core portion will add stability, while the satellite portion can push up the overall returns of the portfolio.

Near the market high, it makes sense to stagger lump sum investments, or even better, take the SIP route if you are planning for financial goals.

Debt

The US Fed and RBI have so far cut policy interest rates by 75 and 125 basis points (bps), respectively, in 2025.

Both the central banks, being watchful of macroeconomic data, kept the stance of the monetary policy neutral.

Even the European Central Bank (ECB) and Bank of England (BoE) cut interest rates cumulatively by 100 bps each.

These actions were taken to support growth, taking courage from lower inflation.

Bank of Japan (BoJ), in contrast, increased its policy rate to a 30-year high as inflation remained above target.

Rate Actions of Central Banks Across the World

The US 10-year treasury yield remained stubbornly high due to uncertainties surrounding trade policies, government debt, and inflation.

The graph below shows that the US Treasury yield is higher compared to 5 years ago, during the COVID-19 pandemic.

US Treasury Yield Has Remained Elevated

The 10-year G-sec yield, after softening in the initial part of the year due to successive rate cuts by central banks in February, April, and June, faced upward pressure in the later part of the year due to heavy government borrowing, a vulnerable rupee, weak foreign inflows, and global factors.

But overall, the 10-year G-sec yield softened compared to the start of the year.

Movement in G-sec Yield

The Way Forward for Interest Rates in 2026 and the Strategy to Follow in Debt Markets

The US Federal Reserve has stated that it would carefully assess incoming data on labour market conditions, inflation pressures and inflation expectations, financial and international developments, and their outlook for the balance of risks.

It appears that the Fed may cut rates by just 25 bps in 2026.

The ECB is expected to leave the rate unchanged.

As regards India, the RBI has decided to keep the stance of the monetary policy neutral. In the last meeting held in December 2025, one member of the Monetary Policy Committee voted in favour of changing the stance of the policy from neutral to accommodative.

If inflation remains benign going forward and the economy slows down for any reason, then to support growth, the policy repo rate may be reduced by another 25-50 bps or so in 2026.

The RBI governor has said that the RBI will continue to meet the productive requirements of the economy in a proactive manner while ensuring macroeconomic stability.

That said, it appears that we are almost nearing the bottom of the current interest rate cycle.

As a strategy when investing in the debt markets now, it may be wise to shift to long-duration debt papers (with around 30% G-secs) with a medium-term view of up to 5 years or so. Here, long-duration debt in a staggered manner would be appropriate.

If you have an investment horizon of 2 to 3 years, some of the PSU debt papers may be considered.

For an even shorter horizon of 1 to 2 years, shorter maturity debt papers can be considered. Here prefer the government and quasi-government ones to accrue interest income.

Avoid the private debt paper for higher returns, where the credit risk is high. Yield hunting should not be a priority, particularly when investing for the short-term.

If you have an investment horizon of up to or less than a year, it would be better to stick to some of the best liquid funds that have no exposure to private issuers.

If you wish to benefit dynamically from both falling and rising interest rates, a bond laddering strategy may be followed, wherein the focus should be on owning bonds with staggered maturity dates. For this purpose, dynamic bond funds can be considered, keeping a horizon of around 3 years.

Please note that when approaching debt investments, your priority needs to be on the safety of principal rather than returns.

Apart from bonds and debt mutual funds, consider fixed deposits with banks with strong financial credibility and management. Avoid those banks offering you an extraordinarily high interest rate, as the risk is also high.

Gold

In 2025, gold has clocked a stellar absolute return of nearly 76% (as of 23 December 2025) in Indian rupee terms, the highest in the last decade.

All the negative events, such as geopolitical tensions, wars and military conflicts, trade tariffs, macroeconomic uncertainty, high debt-to-GDP ratio, and central bank rate cuts, have worked in favour of gold.

The precious yellow metal has proved its trait of being a safe haven, store of value, a hedge, and an effective portfolio diversifier.

In 2025, gold in Indian rupee terms has fared far better than the Nifty 50 (the bellwether index for Indian equities) and the Crisil Composite Bond Index.

The takeaway or learning point from the graph above is that not all asset classes always move in the same direction. Hence, follow a sensible multi-asset approach when investing.

The way forward for gold in 2026 and the strategy to follow

The uncertainties, be it macroeconomic and/or geopolitical, would be supportive for gold.

As per the World Gold Council (WGC), the combination of lower interest rates and a weaker dollar, paired with heightened risk aversion, would create a continued supportive environment for gold.

As per the WGC, gold could rise 5-15% in 2026 from current levels, depending on the severity of the economic slowdown, and the speed and magnitude of the rate cuts.

On the other hand, if Trump's policies are successful, and the world economy also benefits in terms of growth, the US dollar strengthens, and geopolitical risk reduces, then the attention of smart investors would turn away from gold.

Currently, against the backdrop of risks, central banks across the world are also buying gold as part of their reserve management, which is proving to be supportive.

For you as an investor, too, it makes sense to allocate 5-10% of your entire portfolio to gold with a long-term view (5 years or more), assuming moderately high risk. If you are a bit conservative, your allocation to gold can be 10-15% with a long-term view.

Gold, as you may know, is a real asset; it does not carry credit or counterparty risk. Gold has been less volatile than equities and thus approach it as a strategic long-term asset.

Consider investing in gold the smart way - via gold ETFs or gold savings funds. The latter is particularly useful if you wish to take the SIP (Systematic Investment Plan) route.

At a time when gold prices have scaled high, taking the SIP route makes sense, or you could consider making staggered lump sum investments in gold ETFs.

Conclusion

Whichever asset class you are investing in, consider it based on your risk profile, broader investment objective, financial goals, time to achieve those goals, and the asset allocation best suited for you.

Be a thoughtful investor. If you aren't sure how to go about it, then seek the services of a SEBI-registered investment adviser.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a recommendation and should not be treated as such.