Small-cap pain may ease in 2026 as market rotation picks up: Invesco’s Taher Badshah

Small-cap stocks could see a gradual recovery in 2026, alongside more rotation across sectors and asset classes, as market conditions improve. That’s the view of Taher Badshah, Chief Investment Officer of Invesco Mutual Fund, which manages assets worth over $14 billion.

The small-cap index fell about 6% in 2025, but Badshah expects that trend to slowly turn. The recovery, however, is unlikely to be sharp or immediate. “I would be relatively more hopeful of a small cap recovery coming about… more starting second half of 2026,” he said.

After a year in which equities lagged while precious metals delivered strong gains, Badshah believes the balance could shift in 2026 as earnings improve and the economic recovery becomes broad-based.

A wider pickup in earnings, he said, will be the key driver. Past market cycles also suggest that investing during pessimistic phases can work well for those with a two- to three-year time horizon.

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Badshah also expects a shift away from themes that have delivered returns over the past two years. He said investors will need to be selective as some sectors face execution challenges and reassessment of growth potential. Manufacturing, in his view, may take longer to recover, while consumer technology could see more measured growth.

He believes markets may rotate toward consumption-linked and defensive areas. “I think markets will probably rotate a little bit more into somewhat more defensive themes which are probably driven more by consumption,” Badshah said. He sees scope for value retail and high-end retail, supported by steps taken by the Reserve Bank of India (RBI) and the government.

Among other sectors, Badshah remains positive on defence, citing continued government focus and funding. He also sees strength in hospitality and travel, which he views as relatively non-discretionary.

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On precious metals, Badshah said Invesco remains invested after strong gains in 2025. “We are keeping our enthusiasm alive,” he said, adding that the fund’s multi-asset strategy holds around 18% allocation to gold and silver combined. While he does not expect a repeat of last year’s returns, he acknowledged ongoing momentum. In contrast, his view on base metals is cautious, with limited exposure due to a lack of fundamental support.

Summing up his strategy for 2026, Badshah stressed the importance of flexibility. “It is still going to be a year where rotation between asset classes is going to be reasonably heavy,” he said. He advised investors to be ready to rebalance portfolios, rotate between domestic and overseas equities, and adjust exposure across assets as opportunities emerge.

For the full interview, watch the accompanying video

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