India’s equity markets may be nearing the end of their correction phase, with history pointing to improving recovery odds and a likely shift in leadership toward cyclical sectors, according to a strategy note by YES Securities (India) Ltd.

In its report “Where Money Flows – April 2026”, the brokerage said the ongoing decline in the Nifty has slightly exceeded historical trends, suggesting much of the downside may already be priced in.

“Nifty’s ongoing correction has marginally exceeded its historical norm, suggesting much of the downside may already be reflected in prices,” the note said.

Since 2008, the average drawdown during continuous three-month declines has been around 13.7%, compared with the current fall of about 14.8%. The report highlighted that recoveries tend to depend more on time spent in the market rather than precise bottom timing.

“Historically, recoveries are driven more by time in the market than by precise bottom identification,” it said.

Data analysed by the brokerage shows that the Nifty typically delivers about 8% returns over the next three months and nearly 17.4% over six months following a correction.

“Once a correction extends beyond three months, forward return probabilities improve meaningfully, particularly over a six-month horizon,” the note added.

Cyclicals back in focus

The report identifies a clear pattern in sectoral leadership during recovery phases, with cyclical sectors dominating early gains.

“In the first three months post-correction, cyclicals dominate,” it said, naming automobiles, financials, capital goods, construction and metals as consistent outperformers.

Construction materials stood out as the most reliable performer, with outperformance in nearly nine out of ten instances, while financials and autos also showed strong consistency.

“This suggests that early-cycle recovery trades are driven by domestic growth proxies and operating leverage plays,” the brokerage noted.

Over a six-month period, leadership broadens but remains anchored in the same themes.

“Construction Materials emerge as the most consistent outperformer with a perfect track record,” the report said, adding that banks and financial services continue to show strong persistence.

Defensives unlikely to lead

In contrast, defensive sectors such as IT, FMCG and consumer durables are expected to lag in the initial phase of recovery.

“Defensives typically decline less during sell-offs, limiting the scope for sharp rebounds,” the report said.

IT, in particular, has one of the weakest recovery track records.

“IT…stands out with one of the weakest hit rates…reflecting its higher sensitivity to global cycles rather than domestic recovery dynamics,” it added.

FPI selling intensifies, financials and IT bear the brunt

Foreign portfolio investors (FPIs) have remained persistent sellers in Indian equities, with outflows in 2026 continuing to exceed last year’s trend, indicating a cautious stance amid global uncertainties and valuation concerns.

The selling has been concentrated in financials and IT, even as these remain core sectors in benchmark indices.

The report notes that “FPI flows have been consistently negative, with 2026 witnessing a sharper pace of outflows compared to 2025,” highlighting sustained global risk aversion.

Mutual funds rotate toward large-cap leaders

In contrast, domestic institutional investors, particularly mutual funds, have continued to anchor the market through steady inflows, though with a clear shift in allocation strategy.

The report highlights a rotation toward large-cap financials and select leaders, noting that “mutual funds have increased exposure to stocks such as HDFC Bank, ICICI Bank and Bharti Airtel,” reflecting a preference for earnings visibility and balance sheet strength.

Yes Securities suggests that while near-term volatility may persist, the broader setup is shifting, with historical trends favouring a rotation toward cyclicals such as financials, autos and capital goods, even as defensives like IT are likely to lag in the early phase of recovery.