India as an AI hedge? The country’s stocks could see robust inflows as markets globally tank
Investor uses a stylus and tablet to analyze stock market and crypto charts on a large screen, highlighting trading, finance insights, and market data in a moody, focused workspace.
Miniseries | E+ | Getty Images
The Indian stock market is emerging as an attractive hedge as investors seek refuge from a brutal sell-off in the artificial intelligence trade, making it a strong contender for global capital.
As sentiment around AI sours, foreign investors, who have been underweight on the Indian market for nearly two years due to high valuations, subdued earnings growth and lack of local AI tech champions, could start returning.
“If these foreign long only investor groups were to neutralize their underweight in Indian equities, this could translate into potential net inflows of around $115 billion,” Rajiv Batra, head of Asia and co-head of global emerging markets equity strategy at JPMorgan, told CNBC.
He said that multiple factors are currently stacked in favor of the country, such as falling global oil prices, a drop in U.S. Treasury yields, a recovery in earnings growth of Indian companies and unwinding of global AI trade.
“India has emerged as an ‘AI hedge’ for portfolios trimming or diversifying out of crowded AI trades,” Batra said.
Over the last month, the country’s benchmark Nifty 50 has gained nearly 9%, outperforming global markets with heavy AI exposure, including the U.S., Japan, South Korea and Taiwan that are deep in the red as investors ditch tech names.
On Friday, as major Asian markets tracked a sell-off on Wall Street overnight, India’s benchmark indexes bucked the trend to trade higher. That divergence becomes stark as Japan’s Nikkei 225 and Taiwan’s Taiex entered bear territory, while South Korea’s Kospi deepened its bear market and the tech-heavy Nasdaq Composite entered into correction territory overnight.
“India has been dubbed sort of the anti-AI trade, and our view there is that the underlying economic fundamentals have actually been better,” Timothy Moe, chief Asia-Pacific equity strategist and co-head of Asia macro research at Goldman Sachs, told CNBC’s “Squawk Box Asia” on Friday.
He added that markets like India and Australia that were less exposed to the AI trade will see “some relative outperformance,” adding that India’s “domestic demand story” gives it an edge between the two.
Reversal of fortune
Unlike Korea and Taiwan, where indexes are heavily concentrated in AI hardware stocks, Indian benchmarks have little exposure to this segment and are instead focused on financial services, consumption, energy, industrials and other services companies.
“India becomes an attractive alternative because of its size, liquidity and relatively lower dependence on the AI cycle,” at a time when global investors want to cut exposure to AI-related stocks, Feroze Azeez, joint chief executive at Anand Rathi Wealth, told CNBC.
Foreign investors, which net sold more than $31 billion until October of this year, have turned net buyers over the past four days, investing over $2.3 billion, according to data from NSDL.
This wave of optimism around the Indian markets comes at a time when corporate earnings for the September quarter have shown material improvement.
As per data shared by JPMorgan, earnings growth of listed Indian companies is tracking at more than 20%, and consensus earnings per share estimates have been revised up 0.5% for 2026 and 0.6% for 2027 over the past month.
But despite a steep underperformance of Indian indexes over the last year — even for this year so far the key benchmarks are in the red — and the improvement in earnings growth, its valuations are still relatively higher than other emerging markets.
Too expensive?
Global brokerage Bernstein, however, disagrees that the South Asian country should be viewed as an AI hedge.
“India is increasingly being pitched as the hedge to the global AI trade. We disagree. India is neither an AI beneficiary nor an anti-AI trade,” it said in a report on Monday, arguing that India’s valuations remain expensive.
India is trading at a rolling 12-month forward price-to-earnings of 18.6 times, higher than China’s 9.3x and Brazil’s 7.9x, the report showed. It is also trading at a premium to AI-heavy markets like South Korea and Taiwan.
“There are easier and cheaper ways to hedge AI than investing in India,” Saurabh Mukherjea, founder and chief investment officer of Marcellus Investment Managers, told CNBC. He added, though, that India’s earnings growth has been “stellar” for the last two quarters and the valuation of some “quality large caps” is at a decade low.
India has always traded at a premium to the emerging markets of 1.4 times on average since 2007 due to its “durable earnings and a domestically driven growth engine,” JPMorgan’s Batra said.
The country’s markets have struggled since late 2024 due to slowing earnings growth, but that has changed over the last two quarters.
India’s near-term appeal was diluted by “high crude, a weak rupee and the availability of high-growth opportunities elsewhere,” Hari Shyamsunder, vice president and senior institutional portfolio manager of India equities at Templeton Global Investments, told CNBC.
He pointed out that Nifty now trades below its “10-year average forward P/E,” while MSCI India, in October, was at its lowest forward multiple since 2020.
“If crude softens sustainably and growth faces headwinds elsewhere, the picture could change quickly,” he said, adding that foreign capital inflows would depend on sustained earnings growth over the next few quarters.
