Risk-on mood to improve in H2 2025; banks, financials top picks: MOFSL

Motilal Oswal sees risk-on sentiment improving in H2 2025, with banks and financials, led by ICICI Bank, HDFC Bank, and SBI, emerging as top investment picks

Re-rating India: From Resilience to Opportunity

The tides in global markets appear to be turning. After months of volatility and caution driven by geopolitical uncertainties and rate fluctuations, recent developments have injected a note of optimism, particularly across emerging markets. The mood is reflective of more than just relief; there is a growing conviction that some of the structural advantages of these markets are being recognised again by global investors.

 

Most of this renewed optimism has been driven by the easing of tensions in West Asia. Even before any formal ceasefire was agreed upon, investor confidence picked up pace due to diplomatic efforts between Israel and Iran. As crude oil prices have softened and commodity volatility has decreased, markets are now factoring in a lower risk premium. The Brent benchmark has pulled back from its recent highs, and precious metals have also corrected, a positive sign for inflation-sensitive economies like India.

 

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Domestically, this external calm coincides with an environment of relative macroeconomic stability and improving micro-level fundamentals. India continues to offer a credible growth story backed by consumption resilience, credit revival, and strong corporate balance sheets. More importantly, this is not a euphoric or indiscriminate rally. It is stock-specific, grounded in earnings momentum and valuation re-rating. Investors are clearly rewarding companies with demonstrated profitability, scalability, and a track record of prudent capital management. 

Sectors in focus

Within this evolving landscape, the banking and financial services sector stands out. Following two phases of deep-dive research, we narrowed our preference list from over 60 companies to a focused set of 16 names. The private banking space continues to offer leadership through players like ICICI Bank, HDFC Bank, and Federal Bank—all of which are delivering on growth, margins, and asset quality. On the public side, State Bank of India (SBI) remains a well-positioned proxy to India’s capex and credit revival themes, while AU Small Finance Bank leads among small banks with its digital-first approach and superior return metrics.

 

In housing finance, we prefer names like PNB Housing, Home First, and L&T Finance—each benefiting from a combination of improved affordability, regulatory support, and cleaner balance sheets. The insurance sector is also coming into sharper focus, especially in health and general insurance. Niva Bupa is a strong structural play here, demonstrating innovation in distribution and strong premium growth. Meanwhile, within broking, Angel One continues to distinguish itself through robust growth in new client additions, a digital-native model, and sustained margin delivery. In the wealth management space, Nuvama is gaining ground with improving profitability and a differentiated presence in the affluent and HNI segments.

 

Beyond BFSI, we see signs of rotation into industrials, capital goods, and selectively into IT. These sectors could benefit from both domestic capital expenditure acceleration and improved export visibility. Additionally, valuations remain reasonable in several of these pockets, making them attractive from a medium-term investment perspective.

 

Globally, liquidity could become more supportive. The US Federal Reserve indicated possibility of two future rate cuts in 2025 and is reportedly evaluating a reduction in the statutory liquidity ratio (SLR) for banks. If implemented, this could release fresh capital into the system and indirectly benefit emerging markets through improved fund flows. 

IPO market

The Indian IPO market also deserves attention. We are currently in the midst of a historic issuance cycle, with several quality companies tapping the capital markets. Liquidity conditions remain comfortable, but investor selectivity is rising. Issues backed by strong governance, clear business models, and visible earnings potential are seeing robust demand. Those lacking these traits may not find favour despite the buoyant backdrop. This bodes well for long-term market quality.

H2 outlook

As we enter the second half of the year, emerging markets are witnessing a constructive shift in sentiment, marked by a broad-based risk-on appetite among investors. The macro environment is improving, sector leadership is becoming clearer, and global flows are likely to resume as uncertainty recedes. For investors, this is a time to remain stock-specific, valuation-conscious, and aligned with structural growth trends. The opportunity is real, but so is the need for research-driven discipline.

 

(Disclaimer: This article is by Ankit Mandholia, head of equity & derivatives, wealth management at Motilal Oswal Financial Services. Views expressed are his own.)