After all, no one has seen the future.
This question highlights the importance of asset allocation over stock picking.
If you can find the right sectors to allocate funds in your portfolio, individual stock selection can potentially take a back seat.
In this editorial, we aim to guide you in this regard.
Let’s examine three sectors that have the potential for gains in 2026.
Defence
Historically, India relied heavily on foreign countries for its defence needs. About 65-70% of defence equipment was imported until 2018.
However, this landscape has dramatically shifted, with around 65% of defence equipment now manufactured within India. This transformation reflects the country’s commitment to self-reliance.
Moreover, the strength of India’s defence industrial base, which comprises 16 defence PSUs, several private conglomerates such as the Tatas and L&T, over 430 licensed companies, and approximately 16,000 MSMEs, has become robust.
Consequently, the annual defence production is expected to cross the target of ₹1.75 trillion by the end of FY25. The aspiration is to achieve ₹3 trillion worth of defence production by 2029. This would solidify India’s position as a global defence manufacturing hub.
The defence budget reached a record allocation of ₹6.21 trillion for FY25, representing a 4.7% increase from FY24. This amount accounts for approximately 13% of the total budget.
In FY26, the allocation is expected to break all records—at ₹6.8 trillion. This figure includes ₹1.8 trillion for military modernization, also a record. The amount for capital acquisitions was 1.72 trillion or about 27.7% of the total defence budget.
₹1 trillion was also allocated to deep tech as long-term, low- or zero-interest loans. This is aimed at incentivizing the industry to step up its research and development investments and develop cutting-edge technologies for the Indian armed forces.
We have seen a boom in exports as well. Defence exports have surged to a record high of ₹23,622 crore in FY25. This represented a 12.04% growth over FY24.
India has evolved from a largely import-dependent military force to one increasingly focused on self-reliance and indigenous production.
Many defence companies, especially those in high-tech segments such as sensors, radars, missiles, and drones, will benefit from this spending in both the short and long term.
You can check out the best defence stocks in India with Equitymaster’s stock screener.
Software
This sector is down in the dumps currently due to three main reasons.
First, the US government’s new $100,000 fee on H-1B visas.
Second, the slowdown in client spending in the US market due to uncertainty surrounding tariffs.
Third, the disruption caused by AI and the need to train the workforce to be AI-ready.
Clearly, 2025 will not go down as a good year for Indian IT stocks.
However, it would be wrong to write off these stocks for 2026.
Here’s why…
India is the leading IT sourcing destination in the world, with a market share of about 55%.
India’s IT industry estimates that it’s likely to reach a $350 billion revenue mark by 2026 and contribute 10% to the country’s GDP.
These estimates also say that the industry is on track to achieve a revenue of $500 bn by 2030.
This position has been achieved through a combination of cost arbitrage, high-quality and reliable service delivery, as well as strong domain experience and client relationships built over the years.
Indian IT firms have established software development centres worldwide, particularly in developed nations where demand for software services is the highest.
These firms are not resting on their laurels. They have entered into strategic alliances with top international firms across many industries to strengthen their respective competitive positions.
And it’s not just services; the IT product industry in India is also growing strongly. According to the IBEF, this industry is expected to reach $100 billion in revenue by 2025.
In light of increasing competition, Indian software companies are focusing on international expansion to enhance their global presence, while also moving up the value chain.
Indian companies are also focusing on newer models such as platform-based services and the creation of intellectual property.
Indian IT companies have traditionally been run well by their owners and managers.
The global nature of the business instilled a sense of professionalism in the workforce from the industry’s early days.
The listed IT companies, for the most part, are fundamentally strong, usually debt-free, have stable margins, strong free cash flows, good dividend policies, and high return ratios.
You can check out Equitymaster’s stock screener to find the best IT stocks in India.
Data centres
India’s digital economy is expanding at breakneck speed, and at the heart of this transformation lies an industry quietly soaking up billions in investments—data centres.
As businesses, governments, and consumers shift their activities online, the demand for secure, high-capacity data storage is skyrocketing.
The numbers tell the story. India’s data centre market is now worth around $10 billion, with revenues hitting $1.2 billion in FY24, according to Anarock Capital.
The sector has attracted a staggering $6.5 billion in investments over the past decade, and capacity is set to surge 44% to 2.1 gigawatts in 2025.
And India is just beginning its major build-out phase. The long-term potential is huge.
More companies are shifting to the cloud, artificial intelligence is driving heavier workloads, and regulators are pushing firms to keep more data within the country. Global investors, seeing the potential, are lining up to fund the infrastructure.
The result is a wave of expansion that should take third-party data centre capacity from roughly 1,250MW today to almost 2,500MW by 2028.
According to recent media reports, the government is considering a bold plan: offering data centre developers a tax holiday of up to 20 years, provided they meet milestones in terms of capacity, energy efficiency, and job creation.
The draft National Data Centre Policy 2025, now out for consultation, is designed to position India as a global hub for cloud infrastructure, AI, and digital services. The move could open doors not just for data centre operators but also for the companies powering this ecosystem.
For investors, this boom presents a compelling opportunity. A handful of companies stand to benefit significantly from the sector’s rapid expansion.
You can check out Equitymaster’s stock screener to find the best data centre stocks in India.
Conclusion
Well, this was a list of the three sectors we think can potentially produce good investments next year, as long as investors get the stock selection right.
We hope this editorial has triggered your curiosity to dig deeper and find fundamentally strong stocks.
But before you do so, a fair warning. Investors should not go overboard on any sectoral trend.
Do not allocate most of your funds into any one sector. Ensure sufficient diversification of your portfolios. Also, do your due diligence before investing in any stock.
Having said that, these three sectors are poised to do well in 2026 and beyond.
Investors should evaluate the company’s fundamentals, corporate governance, and stock valuation as key factors when conducting due diligence before making investment decisions.
Happy Investing.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
