Indian equities could benefit if global investors scale back their exposure to artificial intelligence-linked stocks and diversify into other markets, including India, according to Manpreet Gill, chief investment officer for Africa, Middle East and Europe at Standard Chartered.
Gill said a pause in the AI-led rally could support Indian shares as the domestic earnings outlook begins to improve. He also favours financial stocks, which he said could benefit from higher bond yields and a steeper yield curve.
The outlook comes as Indian stocks face sustained selling pressure in 2026. The Nifty 50 was down nearly 14% for the year as of early October, entering correction territory, while foreign portfolio investors had withdrawn more than Rs 3 lakh crore from Indian equities. Rising crude oil prices, a weaker rupee and US Treasury yields above 5% have weighed on the appeal of Indian assets.
The sell-off has coincided with a shift in investor interest towards North Asian markets, where technology and AI-linked stocks have attracted capital.
AI Trade
Gill said Indian equities could gain if investors take a pause from the concentrated AI trade, which has driven much of the recent outperformance in parts of Asia.
“That's really the key positive for Indian equities at this point in time,” Gill said, referring to the prospect of investors diversifying away from AI-focused markets. He said South Korean and Taiwanese equity markets had accounted for much of the gains across emerging markets, reflecting their exposure to the AI theme. India, which has not participated in the rally to the same extent, could offer investors an alternative.
READ | India + Gold: Peter McGuire Reveals What He's Bullish On In 2027, And The Sectors On His Watch
Gill said Standard Chartered had favoured Indian equities as a core holding in Asian, emerging-market and global portfolios because they offer diversification from concentrated positions in AI-linked stocks.
He added that questions over the profitability of AI-related capital expenditure could lead investors to reassess their exposure, potentially supporting markets that have lagged the rally.
Earnings Outlook
Gill said the earnings outlook for Indian companies was beginning to improve, providing another potential source of support for the market.
He said the combination of improving earnings prospects and pessimism already reflected in share prices could help Indian equities perform better if the AI trade loses momentum. Higher bond yields remain a challenge for equity investors globally, as they raise the returns investors expect from riskier assets. Gill said US dollar-denominated bonds offering yields of around 5% had raised the threshold that equities must meet to attract capital.
However, he said the increase in yields posed a greater challenge for bond markets than for equities, given the extent of the decline already seen in Indian shares.
Gill described the rise in interest rates as a mid-cycle adjustment, driven by stronger-than-expected economic growth and persistent inflationary pressures, including those linked to energy prices.
Financial Stocks
Gill identified financial stocks as a sector to watch, citing the potential benefits of higher bond yields and a steeper yield curve.
He said these conditions could support financial companies even as higher interest rates raise the return threshold for equity investments.
Gill added that the outlook for Indian equities had improved in the short term compared with a month or two earlier, with the earnings outlook and the prospect of diversification away from AI-linked markets providing potential support.
He said the case for financial stocks reflected both the opportunity to diversify from concentrated AI exposure and the changing conditions in bond markets.
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.