Global turbulence surrounding artificial intelligence has triggered a sharp rebound in Indian equities, with the Nifty IT index surging nearly 19% in July.
India's second-largest asset manager, ICICI Prudential Asset Management, is placing bets on the banking, oil refining, power, and pharmaceutical sectors, citing strong demand-driven opportunities. Sankaran Naren, chief investment officer at ICICI Prudential Asset Management, noted that banking valuations are attractive, while rising demand in power infrastructure and healthcare also presents compelling investment prospects. The firm manages assets worth approximately 11.8 trillion rupees (about $123 billion), with equity assets accounting for over two-thirds of the total. "Banking remains one of the most attractive sectors in India," he said in an interview on Wednesday. Indian bank stocks are trading near five-year lows.
Naren, a veteran fund manager known for promoting contrarian and value investing in India, made these remarks as corporate earnings show signs of recovery. Data indicates that sectors like materials, utilities, and financial services are leading the rebound. Of the 34 companies in the Nifty 50 index that have reported June-quarter results, more than half have exceeded earnings expectations. Improved earnings prospects have driven the benchmark Nifty index higher for a second consecutive month. Additionally, a recovery in foreign inflows and a rebound in Indian software stocks have supported the market. However, Naren warned that a surge in Brent crude oil prices above $90 per barrel poses a risk to this recovery. "If earnings growth improves but macroeconomic risks rise, like oil hitting $100, the market will assign lower valuations. The ideal scenario is earnings improvement with stable oil prices and favorable monsoon conditions," he said.
Naren's $9 billion ICICI Prudential Multi-Asset Fund, which has outperformed 95% of its peers over the past five years, reflects this outlook. The fund has consistently overweighted bank stocks, recently increasing holdings in Kotak Mahindra Bank, HDFC Bank, and Union Bank of India. "Foreign investors have been selling persistently, making many large-cap stocks extremely attractive in terms of valuation," he stated. In March, foreign investors pulled out $6.5 billion from Indian financial stocks, pushing the Nifty Bank index close to bear-market territory. The index has since rebounded over 13%, but its price-to-book ratio remains nearly 20% below its long-term average.
Beyond financials, Naren is bullish on power and pharmaceutical sectors. He sees rising electricity demand driving expansion in generation and transmission grid investments. Pharmaceutical companies benefit from globally competitive export businesses and growing domestic healthcare needs. He reiterated a long-term positive view on the pharma sector, saying, "The pharmaceutical industry has consistently delivered strong returns for us. We still find this sector very attractive."
Fund rotation has fueled a recovery rally. The Nifty IT index surged nearly 19% in July, marking its biggest monthly gain in six years, after suffering its worst first-half performance in 18 years. Investors are shifting from crowded AI trades to relatively cheaper tech stocks. Earlier, concerns that AI technology would disrupt the business model of India's IT outsourcing sector led to a deep correction in the technology segment. In the first half of 2026, the Nifty IT index, a benchmark for Indian tech stocks, fell about 30%, making it the worst-performing sector, compared to a 9% decline in the Nifty 50 index. During that period, foreign investors withdrew over $23 billion from Indian equities. Some market commentators even suggested India was the first country to be "shorted" by AI, spreading pessimism across capital markets and long-term economic outlooks.
However, as AI chip stocks recently corrected, capital has rotated into India's IT services sector, seen as a lower-risk tech play. Jefferies upgraded the Indian IT sector from "underweight" to "neutral," boosting sentiment. Corporate earnings have also provided positive signals. Tata Consultancy Services reported annualized AI business revenue of $2.6 billion, while Infosys said AI-driven services contributed 8.2% of total revenue. Still, market views are not entirely optimistic. Sonam Srivastava, founder of Wright Research, cautioned that this rally is more of a recovery after deep valuation corrections rather than a new demand-driven cycle. Medium-term issues, such as the impact of AI on traditional outsourcing models and weak discretionary spending, remain unresolved. Independent market expert Ajay Bagga noted that July's rebound may be short-lived, with the real test coming from September-quarter new order data, which will determine whether the trend is a structural reversal or a technical bounce from oversold levels.
Comments