AI capex risks cloud US outlook, India stands out as a relative safe harbour for 2026: Jefferies

AI capex risks cloud US outlook, India stands out as a relative safe harbour for 2026: Jefferies

• Jefferies sees India as an "anti-AI capex trade" benefiting from AI adoption
• India's equity market avoids risks tied to heavy AI infrastructure spending
• MSCI India earnings growth expected to rebound to 13–14% next fiscal year

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For all the noise around artificial intelligence, the market narrative is no longer about whether AI changes everything — that part is already priced in. What investors are increasingly grappling with is a more uncomfortable question: who actually makes money once the capex bill comes due.

That concern sits at the heart of Jefferies’ latest global assessment. The brokerage flags an implosion in AI capex as the single biggest risk to the US economy, particularly as spending shifts from being largely cash-funded to increasingly debt-funded through private credit. In doing so, Jefferies draws a direct link between what it sees as the two excesses of the current cycle — AI capex and private credit — now beginning to converge.

The implication for global markets, and India in particular, is subtle but important. If AI transitions from a narrative-driven trade into a return-on-capital problem, capital is likely to rotate toward economies that benefit from AI adoption without having to fund the build-out themselves, the note argues.

Unlike the US, where the AI cycle is being driven by hyperscalers pouring tens of billions of dollars into GPU-heavy, power-intensive infrastructure, India’s listed equity market remains largely a downstream beneficiary of AI adoption. While investments in data centres and AI-related infrastructure are picking up, they are neither large enough nor concentrated enough to create balance-sheet or return risks at the index level.

In Jefferies’ framing, India emerges as an “anti-AI capex trade” — not because it ignores AI, but because it avoids the capital intensity embedded in it. India also remains a relative underweight in AI-heavy sectors, accounting for just 15.3% of the MSCI Emerging Markets Index, compared with 61.5% for Taiwan, Korea and China combined.

Jefferies’ assessment of India, however, begins with an uncomfortable admission. 2025 was a lost year in relative terms, marking India’s worst relative equity performance in nearly three decades when measured against Asian and emerging market peers. MSCI India rose just 4.3% in US dollar terms, sharply underperforming MSCI Emerging Markets and MSCI Asia ex-Japan, both of which delivered gains in excess of 30%.

The brokerage attributes this underperformance not to any structural break, but to a cyclical slowdown reflected across earnings, currency and flows. Earnings growth moderated, the rupee weakened by 4.7% over the year, and foreign investors pulled capital. Crucially, however, Jefferies does not see this as the start of a deeper macro imbalance. Instead, it argues that the worst for the rupee may already be behind.

India’s current account deficit for the ongoing fiscal year is projected at just 0.6% of GDP, close to a 20-year low, while foreign exchange reserves stood at a comfortable $697 billion as of late December — equivalent to around 11 months of import cover. These buffers, Jefferies says, significantly limit downside risks to the currency barring a sharp external shock.

The flow picture, too, is more nuanced than headline foreign selling suggests. While foreign investors were net sellers of Indian equities in 2025, domestic capital continued to provide a strong counterbalance. At the same time, Jefferies flags a widening gap between gross and net foreign direct investment.

Gross FDI inflows rose 13% year-on-year to $81 billion in FY25, and increased a further 15% YoY to $58 billion in the first seven months of the current fiscal year. Net FDI, however, fell sharply from $10 billion in FY24 to just $1 billion in FY25, before recovering modestly to $6 billion in April–October. The divergence largely reflects private equity exits, repatriation flows and a sharp rise in outbound direct investment by Indian companies, which jumped 69% YoY to $28 billion in FY25.

Rather than signalling capital flight, Jefferies interprets this as evidence of India’s deeper integration with global capital markets, where domestic firms are increasingly deploying capital overseas and financial investors are monetising long-held positions.

From a cyclical perspective, Jefferies sees early signs that growth momentum could improve in coming quarters. Credit growth — a key leading indicator — picked up from 9% YoY in May to around 12% by mid-December, following last year’s monetary easing and GST rate cuts implemented in September.

On this basis, the brokerage expects MSCI India earnings growth to rebound to 13–14% in the next fiscal year, up from 8–9% currently. That said, it cautions that valuations leave little room for disappointment. Without a visible earnings pickup, Indian equities — particularly mid- and small-cap stocks — remain vulnerable. The Nifty currently trades at around 20.4x one-year forward earnings, while the Nifty Midcap Index is priced at a much richer 28.5x, despite higher forecast growth.

Jefferies also reiterates its broader structural view that the US has likely peaked as a share of global market capitalisation and that the dollar has entered a long-term downtrend, even as global ex-US equities break out of a multi-decade range.

That shift has already begun to show up in market behaviour. In the opening trading week of 2026, US equities displayed a clear bifurcation in leadership. While headline indices held up — with the Dow touching record highs — gains were driven more by energy and cyclical stocks than by a broad-based rally in AI-linked technology names.

Over the past year, US markets delivered strong overall returns, with the S&P 500 rising about 16.6% in 2025, largely led by mega-cap AI beneficiaries. More recently, however, brokers have pointed to growing valuation stress and early signs of investor rotation, as exposure narrows and capital shifts toward sectors offering more defensible returns.

At the same time, the brokerage argues that the macro stress points troubling global markets — debt-funded capex, private credit exposure and return dilution — are largely absent from India’s index structure.

After its worst relative year in three decades, foreign exits largely complete and the currency adjustment already absorbed, India is being positioned less as a momentum trade and more as a portfolio stabiliser.