Expert's Warning: Why You Should Be Cautious in Small and Mid-Cap Stocks in 2026

As the market reaches a cyclical high, investors are advised to exercise caution, particularly in the small and mid-cap spaces. This warning comes from a seasoned investment expert who emphasizes the importance of focusing on companies with proven profitability rather than speculative narratives.

Investment Strategy for 2026

The expert, Anish Tawakley, Co-CIO (Equity) at a prominent asset management company, shared his investment strategy for 2026. He expressed a preference for large-cap stocks over a three-year horizon, viewing them as offering a more reasonable risk-return trade-off. Tawakley warned against 'vaporware' companies where the story far exceeds the reality, and advised investors to be watchful of significant selling by promoters and private equity firms in the small and mid-cap segments.

Sector-Specific Views

Tawakley remains positive on the financial services space, but with clear preferences. He favors large, scaled banks, arguing that banking is an industry driven by scale and customer franchise, not just capital. Within financials, however, he advises avoiding the unsecured consumer lending space.

Financial Services

• Large, scaled banks are preferred due to their scale and customer franchise.
• Unsecured consumer lending space should be avoided.
• Asset management companies (AMCs) are seen as less cyclical than brokerages.
• AMCs are less capital-intensive than banks or insurance, allowing them to pay out a higher proportion of their earnings.

Insurance Sector

Tawakley prefers life insurance over general and health. He views health insurance as a particularly challenging industry due to the complexities of managing fraud from hospitals, patients, and doctors, and is not confident about sustainable business models in that space yet.

Critique of EMS Sector

Tawakley issued a strong critique of the investment rush into the Electronics Manufacturing Services (EMS) sector, particularly the way the market values companies based on the Production Linked Incentive (PLI) scheme. He argued that the market is making a mistake by applying a valuation multiple to PLI earnings, which he considers non-recurring.

Technology Front

Tawakley distinguishes between traditional IT services and new-age tech firms. He is currently avoiding mature software services businesses, anticipating a cyclical weakening of the US economy. Regarding new-age tech companies, especially those operating at a loss, he urged caution, requiring a demonstrated track record of profitability before investing.

Looking Ahead to 2026

Tawakley is optimistic about the domestic economy's momentum. Consequently, he favors sectors poised to benefit from domestic growth, including financials, industrials, capital goods, automobiles, and cement.

Remember, this is a perspective, not a prediction. It's essential to do your own research and consider your own risk tolerance before making any investment decisions.