As global markets increasingly pivot toward artificial intelligence-driven trades, one portfolio manager is advising investors to look at India with caution — but selectively load up on IT services stocks as a defensive play. The advice comes amid growing concerns that AI-related equities may be overextended, prompting a search for hedges that can weather potential volatility.

The Case for Underweighting India

The portfolio manager, speaking to CNBC, recommended an underweight position in Indian equities overall. While India remains a long-term growth story, near-term valuations and domestic headwinds may limit upside. The manager pointed to rich valuations and potential earnings slowdowns as reasons to trim exposure.

However, the stance is not uniformly bearish. Instead, it reflects a tactical allocation — reducing broad India exposure while finding pockets of value that can serve as buffers against global AI market swings.

IT Services: A Strategic Hedge

The key recommendation is to buy selective IT services stocks. These companies, many of which are headquartered in India, have traditionally benefited from global digital transformation spending. But in the current environment, they offer something more: a hedge against the concentrated AI trade.

How does that work? IT services firms are often leveraged to enterprise technology budgets, which remain robust even as AI hype cools. They provide essential services like cloud migration, data management, and legacy system upgrades — areas that are less speculative than pure-play AI startups.

Why IT Services Could Outperform

  • Stable demand: Enterprises continue to invest in digital infrastructure regardless of AI sentiment.
  • Valuation support: Many IT services stocks trade at reasonable multiples compared to AI darlings.
  • Diversified revenue: These firms serve multiple industries, reducing concentration risk.
  • Global exposure: Though headquartered in India, their earnings are largely dollar-denominated, offering currency benefits.

Navigating the Global AI Trade

The global AI trade has been a dominant theme, driving indices to record highs. Yet, some investors worry about a potential correction if earnings fail to meet sky-high expectations. The portfolio manager suggests that IT services can act as a stabilizer, providing earnings visibility and lower beta.

This is not a blanket endorsement of all IT names. The manager emphasized selective buying, implying that investors should focus on companies with strong balance sheets, proven execution, and exposure to high-growth verticals like cloud and cybersecurity.

Risks and Considerations

Of course, no hedge is perfect. IT services stocks face their own challenges, including margin pressure from wage inflation and competition from global players. Additionally, an underweight India stance means missing out on domestic consumption stories that could surprise to the upside.

Investors should also be mindful of currency fluctuations and geopolitical risks that could impact multinational IT firms. The recommendation is a tactical tilt, not a long-term strategic shift.

Key Takeaways

  • Underweight India: Reduce broad India exposure due to valuation and growth concerns.
  • Selective IT services: Choose quality IT services stocks as a hedge against AI volatility.
  • Hedge rationale: IT services offer stable demand, reasonable valuations, and diversification.
  • Not a blanket call: The advice is selective, focusing on fundamentals.

In a market increasingly driven by AI narratives, having a defensive layer like IT services could prove prudent. While the underweight stance on India may seem counterintuitive given its growth prospects, the manager's logic underscores the importance of tactical allocation in a complex global landscape.