It has been a topsy-turvy 2026 for the markets thus far. Harsha Upadhyaya, president and chief investment officer at Kotak Mahindra Asset Management, tells Puneet Wadhwa in an email interview that if the markets are to move up meaningfully from here, leadership is more likely to come from sectors with earnings visibility rather than pure re-rating. Edited excerpts:

Have the recent geopolitical events altered your investment preference?

What’s the road ahead for the markets? When can we expect the worst to be over?

We avoid calling a “worst is over” too confidently as markets rarely give that clarity. That said, a good part of the near-term negatives is better understood and partially reflected in prices. At current levels, the market appears to be factoring in moderation in near-term earnings growth for parts of the economy, lower margin tailwinds versus the post-Covid period, higher dispersion—meaning not all sectors participate equally, and liquidity sensitivity, especially in the frothier segments. If the markets move up meaningfully from here, leadership is more likely to come from sectors with earnings visibility rather than pure re-rating.

Which sectors are likely to lead the earnings recovery?

Likely leadership areas (selectively) would be financials where growth has started pick up and asset quality stays stable; interest rates to remain stable implying no impact on interest margins; Industrials / capital goods / engineering as overall capex continues, and execution stays strong; select consumption plays where rural/urban demand normalises, and input cost volatility is lower, and the auto and ancillaries pack where volume growth and product mix remain supportive.

View on small-and mid-caps (SMID)?

The SMID segment has some excellent businesses, but also greater valuation and liquidity risk. After strong periods, the burden of proof shifts to earnings. If earnings recovery broadens and is sustained, quality SMIDs can participate—possibly outperform—but it will be more selective than what investors have seen in broad SMID rallies.

Did the December 2025 (Q3-FY26) quarter earnings give confidence for next fiscal?

To what extent will the recent trade deals help their earnings recover?

For SMIDs, benefits can be indirect and uneven due to trade deals. A supportive trade environment can help via better export demand for niche manufacturing, supply chain diversification opportunities and lower input volatility in some cases. But for many SMIDs, execution, balance-sheet strength, and governance matter more than macro headlines. So yes, trade-related tailwinds can help select pockets, but the primary filter remains fundamentals and valuation.

Gold exchange traded funds (ETF) inflows beat equity-oriented schemes in January. Do you foresee a trend reversal ahead?

Short-term flows can be noisy—one month doesn’t make a trend. Gold tends to attract flows when investors are seeking portfolio insurance, when real rates and currency expectations shift, or when risk perception rises. Do we see a sustained reversal away from equities? Not necessarily. 

In India, equities are often a long-term wealth creation product and flows typically normalise once volatility stabilises. What is expected is a more balanced allocation mindset, where investors use gold as a diversifier rather than a return-chasing asset. 

For a mutual fund investor, is it the right time to invest in flexicaps, or commodity ETFs for wealth creation in 2026?

Over multi-year horizons, equities—especially via diversified funds like flexicaps—have a stronger structural case because earnings growth compounds. Commodity ETFs, including metals, are typically better viewed as tactical allocations or diversifiers, not primary compounding engines.

Flexicaps offer two advantages in uncertain markets. First, the manager can move across market caps based on valuation and earnings quality; and second, they can manage risk through portfolio construction when dispersion is high.

Commodity ETFs, on the other hand, can complement a portfolio if the investment goal is diversification or inflation/uncertainty hedging, but relying on them for long-term wealth creation is more cycle dependent.

So, for 2026, core investments should be in diversified equities (flexicap) and satellite in commodities if it fits the investor’s risk profile, rather than an either/or.