ICICI Prudential's Anand Shah believes India's underwhelming 2025 market performance may have delivered an unexpected benefit—a much-needed valuation reset that could create selective opportunities in 2026. While global emerging markets surged nearly 30%, India barely managed to break even in dollar terms, a stark underperformance that Shah views as addressing long-standing valuation concerns.

"One of the biggest issues earlier was the valuation premium India traded at," Shah explained. "To that extent, valuations are not so much of an issue anymore." This reset forms the foundation of his outlook for 2026, which he expects will prioritize execution over grand market narratives.

AI Investment Risks Create Opportunity

Shah acknowledges AI's technological inevitability but questions the premium valuations commanding global capital flows. He draws parallels between today's AI investment frenzy and the telecom sector's early 2000s experience, where demand certainty didn't translate to sustainable business models for many companies.

"The issue was not whether people would use it," Shah noted about the telecom comparison. "The issue was cash flow." This overinvestment risk, combined with premium valuations, creates what he terms 'extreme risks' in AI-linked stocks.

Should AI sentiment shift even marginally, Shah anticipates capital could flow toward markets offering growth without binary outcomes—positioning India as a potential beneficiary.

Indian IT's Strategic Position

While acknowledging that India won't lead AI creation, Shah sees Indian IT firms as well-positioned enablers rather than builders. He points to the sector's historical success in monetizing major technology transitions, from addressing global computing challenges to facilitating cloud migrations.

As enterprises transition from AI experimentation to deployment, Shah expects demand to shift toward areas where Indian IT firms maintain structural advantages:

• Integration services
• System optimization
• Cost control solutions

This positioning aligns with Indian IT's traditional strengths in helping global corporations adapt to technological changes.

Sector-Specific Opportunities

Despite cautioning against expecting valuation-led market rallies, Shah remains constructive on specific sectors. With profit-to-GDP already recovering significantly, he emphasizes that "market expectations have to align with nominal GDP growth."

Shah particularly favors services-led consumption over product consumption, citing high penetration levels in product categories. In manufacturing and allied sectors, valuations have necessitated a shift toward selective, bottom-up stock picking rather than broad thematic investing.

Execution Over Narrative

Looking ahead, Shah believes 2026 will mark a fundamental shift in investment approach. "The theme for 2026 is narrative to execution, macro to micro," he stated, suggesting that the era of easy thematic investing—whether in AI, manufacturing, or China-plus-one strategies—is giving way to more rigorous scrutiny and execution-focused analysis.

This transition from grand narratives to selective opportunity identification reflects a broader maturation in market approach, where fundamental execution capabilities may matter more than participation in popular investment themes.

Indian equity markets present a nuanced valuation landscape as global fund managers recalibrate their portfolios at the start of 2026. While Indian equities have retreated from their recent peaks, they continue to trade at a premium compared to most regional Asian markets, highlighting the complex dynamics facing investors in the world's most populous nation.

Current Valuation Metrics Show Meaningful Cooling

The Nifty index now trades at a price-to-earnings ratio of 22.75 times, representing a notable decline from its five-year average of 24.51x. This valuation moderation marks a significant cooling-off period following sustained underperformance against global markets.

This retreat reflects the challenging environment that characterized 2025 for Indian equities, including cautious earnings growth, global risk aversion, and nearly 15 months of intermittent foreign institutional investor selling.

Regional Comparison Reveals Persistent Premium

Despite the domestic valuation moderation, Indian equities maintain a substantial premium when compared to other emerging Asian markets. Regional peers trade at significantly lower multiples, creating a stark contrast in investor expectations.

This persistent premium underscores India's positioning as a structural growth story rather than a deep value opportunity. The higher multiples are supported by strong domestic consumption patterns, infrastructure-led capital expenditure, and relative macroeconomic stability.

Global Context and Market Dynamics

The valuation landscape becomes more complex when considering global markets, particularly the United States. US equities remain the most expensive among major markets, trading at elevated valuations despite concerns around inflation, economic uncertainty, and trade-related disruptions. The resilience of Wall Street, powered by large technology and AI-linked stocks, has diverted global capital away from emerging markets, including India, throughout the past year.

Outlook and Investment Implications

Looking toward 2026, expectations are building for potential renewed global investor interest in Indian markets. The below-average valuations relative to historical norms improve the risk-reward equation, though this factor alone may not be sufficient to trigger substantial capital inflows.

Several catalysts could drive reassessment of Indian equities:

• Sustained pickup in earnings growth momentum
• Progress on US-India tariff arrangements
• Signs of fatigue in the crowded US AI investment theme
• Improvement in global capital flow patterns

Market Positioning and Future Prospects

India currently occupies a middle ground in the global valuation spectrum. While no longer expensive relative to its own historical standards, the market continues to command a premium over regional competitors. Whether this premium narrows or strengthens in 2026 will depend primarily on the return of earnings momentum and shifts in global capital allocation patterns, rather than valuation comfort alone.

The success of Indian equity markets in 2026 will ultimately hinge on the market's ability to deliver on the growth expectations that justify its premium positioning, while navigating the complex dynamics of global investor sentiment and capital flows.