Where to invest as market headwinds ease: Motilal Oswal backs mid and smallcaps, favours gold over silver

Several of the headwinds that weighed on Indian equities over the past year have begun to ease, according to Motilal Oswal Private Wealth’s latest Alpha Strategist report for August 2026, titled “Clearing Skies”. The firm, however, continues to maintain a Neutral view on equities while retaining its Overweight stance on mid and small caps.

The report said Indian equities had faced geopolitical uncertainty, capital flows towards the AI-led rally in the US and North Asia, persistent FII selling, pressure on the rupee and insufficient domestic earnings momentum over much of the past year. “Over the last 2–3 months, however, several of these clouds have begun to disperse and skies are gradually clearing,” it said.

Globally, the US economy remains resilient and the structural AI investment cycle remains intact, but Motilal Oswal said the trade has become less one-directional. The sharp correction in Korea, it noted, has exposed excesses around valuations, concentration and leverage, narrowing some of the relative advantages previously enjoyed by AI-heavy markets.


The report sees India as relatively better positioned in this environment, given its greater dependence on domestic demand and lower dependence on global technology-led growth. Around 78% of MSCI India revenues are generated domestically, while 66% of Nifty 500 market capitalisation is in domestic-facing sectors.

“Unlike previous cycles, India’s market leadership is increasingly distinct from the tech-led global rally, with different sectors driving returns,” the report said, adding that this divergence could support relative outperformance if the global AI trade unwinds.

The report also pointed to South Korea’s KOSPI, which corrected roughly 40% from its June peak within weeks after a leverage-fuelled rally in AI-linked stocks unwound, as evidence of the risks associated with concentrated, momentum-driven markets.

FII flows, earnings provide support

The domestic backdrop has also improved, according to the report. RBI measures have strengthened dollar liquidity and supported INR stability, while FII flows turned positive following an extended period of selling.

In July, FIIs turned net buyers with inflows of $2.5 billion, marking the first month of net buying after four consecutive months of selling. The Nifty 50 rose 2.2% month-on-month to close at 24,384, its first close above 24,000 in five months, although it remained down 6.7% for CY26 year-to-date.

Sector leadership also reversed sharply, with IT rebounding 17% after being the weakest performer in June.

Corporate earnings have also provided support. Q1FY27 Nifty 50 earnings grew 18% year-on-year, compared with an estimated 10% growth, while FY27–28 earnings expectations have remained broadly intact.

Motilal Oswal said the extended period of market consolidation has allowed earnings to catch up with prices, making valuations more supportive relative to previous highs and strengthening the market’s underlying base.

Despite the improved backdrop, the firm is retaining a Neutral view on equities. Its preferred equity exposure remains tilted towards mid and small caps, where it sees higher earnings growth and a stronger domestic backdrop supporting the investment case.

The recommended equity allocation remains at 40% Hybrid/Large Caps, 10% Global Equities and 50% Mid and Small Caps.

For deployment, the firm recommends lump-sum allocation in hybrid strategies and staggered deployment in pure equity strategies. It also recommends using any sharp market correction to accelerate allocations.

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Gold preferred over silver

Motilal Oswal remains Neutral on precious metals overall but has a preference for gold over silver.

Gold continues to merit allocation amid elevated geopolitical risks, fiscal concerns and sustained central-bank demand. Gold had risen to around $4,400 an ounce in early August, up roughly 9% since the end of July, with central-bank purchases increasing five-fold between Q1 and Q2 2026.

Silver also rebounded to around $66 an ounce, gaining about 14% over the same period. However, the firm said silver remains significantly more volatile and more sensitive to the global growth and manufacturing cycle, warranting a relatively measured allocation.

The report’s broader investment view is anchored in the increasing breadth of India’s domestic growth drivers.

“The defining feature of India’s equity market today is the breadth of its growth drivers,” said Sandipan Roy, Chief Investment Officer, Motilal Oswal Private Wealth. “Domestic consumption, investment, financial deepening, and manufacturing push are emerging as multiple engines of growth, making the market less dependent on any global cycle.”

“This breadth gives us greater confidence in the underlying opportunity, particularly across mid and small caps, where higher earnings growth, and a stronger domestic backdrop are supporting the investment case, while staying disciplined on accrual in fixed income and gold as our core precious metals holding,” Roy said.

Fixed income strategy focused on accrual

On fixed income, the Reserve Bank of India maintained status quo with a dovish but cautious tone, raising its FY27 growth forecast to 6.7% and lowering its CPI inflation projection to 5.0%.

The softer inflation outlook supports a pause through CY2026, while global risks leave room for a 25-basis-point rate hike in early CY2027.

The 10-year G-Sec yield has softened to around 6.75–6.80%, close to pre-US-Iran war levels. The firm expects yields to remain range-bound between 6.6% and 6.9%, limiting near-term trading opportunities.

Against this backdrop, the firm continues to prefer accrual-oriented strategies across the credit spectrum and income-generating assets such as InvITs as the core fixed-income allocation. It also favours performing and private credit and high-yield NCDs, supplemented by liquid alternatives such as Hybrid SIFs, arbitrage funds and conservative equity savings funds.

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