ETMarkets Smart Talk | Large-cap stocks offer the best risk-reward in a narrow and polarized market, says Ritesh Taksali

Amid rising global volatility, stretched valuations and uneven market breadth, Indian equities are going through a phase of sharp polarization.

In an interaction with Kshitij Anand of ETMarkets, Ritesh Taksali, Chief Investment Officer at Edelweiss Life Insurance, says investors should tilt their portfolios towards large-cap stocks, which currently offer the most attractive risk-reward profile.

He believes that while India’s long-term growth story remains intact, near-term returns may stay muted due to geopolitical uncertainty, FII outflows and relatively expensive valuations compared to other emerging markets.


Taksali also shares his views on Budget 2026 expectations, precious metals as portfolio hedges, the evolving IT sector and how investors should approach small- and mid-cap stocks in the current market environment. Edited Excerpts –

Q) It looks like there is some nervousness on D-Street – is it because of Budget or geopolitical concerns. How should investors decode?
A) There is heightened volatility since 2025 due to multiple events unfolding simultaneously. Geopolitical uncertainties, trade tensions, weakening INR amidst FII outflows have kept markets on edge.

Post Covid, Indian equities have traded at a significant premium to their emerging market peers. MSCI India’s forward P/E ratio consistently hovered around 20-22x, compared to the MSCI Emerging Market average of 11-13x. This premium was largely justified by strong structural growth narratives, robust domestic consumption, and policy reforms.

However, with attractive opportunities in undervalued markets, or in sectors with more certain growth drivers (e.g., AI-driven tech), India’s high valuations have become a significant barrier.

Lower valuations in other EMs, and growing interest in hi-tech companies particularly within China, South Korea, and Taiwan made India relatively less attractive. The MSCI Emerging Markets Index (MSCI EM), outperformed the Indian equity indices MSCI India by 30% in 2025.

India is positioned to perform well in the medium to long term, though short-term performance may remain muted as geopolitical developments continue to influence investor sentiment.

Q) What are your expectations from Budget 2026 from a market and economic perspective?
A) We expect govt to set a fiscal deficit target of 4.3% for FY 27, which will align with government’s agenda of reducing centre’s debt/GDP ratio to pre-pandemic level of 50% by FY 2031. FY 25 debt/GDP ratio stands at 57%, while that in FY 26 is expected to be 56%. This emphasises govt’s commitment to gradual fiscal consolidation and shift towards debt/GDP ratio as primary anchor, in line with global practices.

On the revenue front, we anticipate GST growth to remain muted, direct tax growth at 13%. Non-tax revenue will continue to contribute strongly to total revenue growth by way of RBI dividend.

In order to prioritize capex, it should grow by 10-15% YoY with focus on defence, manufacturing, trade-tariff impacted sectors. Revenue expenditure will see a slower growth with limited growth in subsidies and non-essential spending.

We think that the scope of influence of the budget has become relatively narrower over the years, owing to a flurry of extra-budgetary steps such as GST rates rationalization, labor code overhaul, introduction of Electricity (Amendment) Bill, Nuclear Power & FDI Reforms in insurance and pension sectors etc. – hence, equity markets will be assessing the budget only for targeted, selective measures to drive growth in certain sectors and revisions of capital gain tax for domestic or foreign portfolio investors, if any.



Q) There are 2 precious metals which have not lost their sheen even in 2026 – Gold & Silver. We have seen some volatility – how should one play this theme?
A) Gold has reasserted its role as the market’s preferred safe haven amidst persistent macroeconomic uncertainty and pressure on DXY index. Central bank accumulation has also been one of the defining gold market themes since 2022 as reserve managers looked to diversify away from dollar-denominated assets.

Silver has also seen sharp rally amidst strong buying interest because of rising geopolitical risks and broad weakness in the US dollar. Industrial demand has provided an additional tailwind for silver, reflecting its role in solar manufacturing and advanced semiconductors linked to artificial intelligence. Demand from Electric vehicle, power electronics, and data-centre infrastructure industries have added pull.

In addition, the perceptions that silver was undervalued relative to gold, combined with stronger sentiment in the broader industrial metals complex, have further contributed to silver’s exceptional performance in 2025 and in 2026 so far.

From an investment perspective, precious metals continue to behave as a flexible hedge, so investors should have some allocation to these in the portfolio. Their low correlation to equities and bonds offers diversification benefits, particularly when traditional asset classes move together.

In years when equity markets were muted or negative, precious metals, particularly, gold often provided meaningful offsets. In addition, because they are priced globally in dollars, they also act as a natural hedge against rupee depreciation.

Q) Which sectors are likely to remain in limelight in Budget?
A) There is likely to be a strong emphasis on higher capital expenditure across key sectors such as defence, infrastructure, power and capital goods, reinforcing the government’s investment-led growth strategy.

This could be complemented by select capital market and tax-related measures aimed at improving investor participation and market efficiency.

Support for credit flow into smaller and priority lending segments, including microfinance institutions, MSMEs and small borrowers, is also expected to be a key area of intervention.

In addition, the Finance Minister may announce a series of procedural and regulatory reforms, continuing the government’s broader push to improve ease of doing business, strengthen investor confidence and make India a more attractive destination for long-term foreign direct investment.


Q) The December quarter earnings are underway – what is your take on the earnings which have so far?
A) The ongoing earnings results have largely been in line. There have been some one-off costs such as regulatory transition effects, particularly from the implementation of the new Labour Code or provisioning impacts in case of banks.

There are early signs of recovery in IT sector, as several IT majors have offered more constructive outlooks, driven by AI-led demand. Early indications suggest NBFCs, metals, and new age companies have also been encouraging.


Q) Hiring has taken back seat in the Indian Technology sector. What is your take on the service space amid rupee depreciation, rise of AI and global slowdown?
A) Hiring in the Indian IT services sector has slowed sharply, reflecting a weak demand environment rather than a structural breakdown.

Sector growth has decelerated significantly, with FY26 revenue growth estimated at around 2% YoY (barring some mid-tier IT firms which are showing relative resilience).

Nearly 50–55% of industry revenues come from the US, making the sector highly exposed to global slowdown risks and delayed discretionary spending.

AI is transforming delivery models, but its near-term impact is deflationary. GenAI is improving productivity and reducing incremental hiring needs, even as adoption increases. BFSI, which contributes a large share of sector revenues, remains the most stable vertical with consistent QoQ growth, while healthcare, manufacturing and retail continue to lag.

From a financial perspective, margins should improve due to combination of factors such as weaker INR, benign supply, muted wage inflation and AI led deflation.

The sector underperformed broader markets by 23 percentage points in 2025, but valuations are now more reasonable.

Growth is expected to recover gradually, with sector revenues projected to rise to around 6% YoY in FY27, compared to 2% in FY26, supporting a medium-term earnings recovery.

The focus is shifting from hiring to AI adoption, productivity, and capital-efficient growth, signalling a structural transformation of the services model rather than a cyclical slowdown alone.


Q) How should one play the small & midcap theme?
A) Indian equities have been in a polarization phase, with market concentration at the lowest level since September 2024. Overall market breadth remains narrow. In such markets, historically, heavyweights are where the safety lies, which have outperformed in the current episode as well.

Post the recent correction, the mid to-large-cap premium has compressed sharply, from 75% in September 2024 to 40% currently, while small caps trade at a 20% premium to large caps, both above +1 standard deviation of historical average.

From an allocation standpoint, large caps still offer the most attractive risk reward, followed closely by mid caps, while small caps call for a more selective approach.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)