How the global AI trade pulled money away from Indian equities

This, in turn, has weighed on the benchmark indices, which have given investors poor returns. Foreign institutional investors have already been steady sellers in Indian equities. Weak earnings growth has kept sentiment subdued despite government attempts to boost consumption.

In comparison, most emerging markets that have exposure to the AI theme have given investors stellar returns. Global AI plays have absorbed much of the capital moving out of India.

On the emerging markets front, there is a clear rotation towards tech-heavy markets like South Korea and Taiwan, as India’s valuations remain elevated and earnings momentum stays weak.

In the September quarter alone, FIIs bought fifteen billion dollars of Taiwanese equities, which is the highest quarterly inflow ever. Positioning in South Korea is now at its strongest in more than a decade, while foreign investors continue trimming their exposure to India. China leads with AI company valuations nearly doubling in a year, growing ninety six percent.

South Korea is close behind, with the market-cap of AI firms jumping ninety four percent in one year.

Japan and Taiwan are also seeing strong momentum, with AI market caps rising more than sixty percent and forty seven percent.

And in the US, the world’s biggest AI market, valuations continue to surge, with AI companies adding over forty percent in the past year. Across regions, the AI trade is powering some of the strongest equity gains.

However, there is still hope for India. As domestic earnings see an improvement, with the government’s repeated attempts to boost consumption, FY27 may be a better year for equities.

Not just that, experts have noted that the AI rally could be losing steam. The Nasdaq slipped three percent last week, indicating the first real pause, while the Bloomberg AI index slipped 4 percent last week.

"If this trend persists without high volatility, that would make the US market healthy,  preempting a bubble formation and its eventual burst. Investors have to watch how this trend plays out," said VK Vijayakumar, Chief Investment Strategist, Geojit Investments.

He added that FIIs, particularly the hedge funds, who have been consistently selling in India and taking money out  for playing the AI trade, are now likely to pause and slowly reverse the AI trade in favour for non-AI trade in countries like India.

And the timing aligns well. Earnings growth in India is improving and is expected to accelerate, which will provide fundamental support for a potential rally going forward.

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