Underperformance phase likely ending for Indian equities: ICICI Securities

ICICI Securities says Indian equities may be emerging from a prolonged weak phase as valuations ease, growth improves and key macro risks recede

Indian equities may be nearing the end of a prolonged phase of underperformance, with multiple headwinds that weighed on markets since September 2024 now showing signs of easing, according to a strategy report by ICICI Securities.

 

The report notes that equities had faced pressure from elevated valuation premiums, subdued nominal gross domestic product (GDP) and earnings growth, sustained foreign portfolio investor (FPI) selling, artificial intelligence (AI) infrastructure euphoria, and external shocks including US tariffs and a spike in crude oil prices due to geopolitical tensions in West Asia. However, several of these factors are now reversing.

 

In this calendar year so far, the benchmark indices have corrected nearly 9 per cent while the net outflows by overseas investors stands at ₹2.73 trillion as of June 24.

 

“Valuations, from the peak of around 24x, have scaled back to around 18x; in parallel, the outlook for nominal profit growth is showing vigour, with inflation rising from the troughs alongside resilient corporate volumes and an improving capex cycle,” noted the report.

 

It added that the lower end of the valuation range currently provides a high-probability scenario of stock prices tracking accelerating nominal growth of 14-15 per cent, even without valuation re-ratings.

 

 “The AI infrastructure stock euphoria has started to show signs of fatigue, with volatility in stock prices rising across Nasdaq Big Techs to Korean AI stories. It is coinciding with post-IPO price reversal (SpaceX), concerns on misallocation of capital, debt raising and fear of rising competition,” it added.

 

However, the brokerage states that while AI stock excitement may temper, a market-wide meltdown appears improbable.

 

“Relatively strong balance sheets of hyperscalers and optimism as regards to robust demand offer a buffer against a collapse that could be a systemic risk for global equities,” the report notes.

 

The brokerage report notes that recent macroeconomic indicators have also turned supportive. India’s GDP grew 7.8 per cent in the fourth quarter of FY26, led by gross fixed capital formation. RBI’s slew of measures may help attract foreign flows into debt instruments.

 

The current account recorded a surplus, aided by services exports and remittances. Meanwhile, crude oil prices have declined below $80 per barrel, the rupee has strengthened to below 95 against the US dollar, and the 10-year bond yield has softened to under 6.9 per cent.

 

The report highlights that lower oil prices are particularly beneficial for Indian equities, given the inverse relationship between crude prices and the Nifty 50 index at elevated levels. A moderation in oil prices could ease pressure on the external sector by reducing the import bill.

 

FPI outflows, which had been driven by selling in concentrated positions, are also beginning to moderate as geopolitical tensions ease.

 

The report, however, points to risks such as the potential El Nino in 2026 and the possibility of US rate hikes later this year.