India’s struggle to attract foreign capital this year has less to do with domestic valuations and more to do with the global AI mania that has rewritten the world’s flow map, says Pankaj Tibrewal, Founder & CIO of IKIGAI Emerging Equity Fund.
Tibrewal argues that the AI supercycle has created a structural diversion of capital toward just a handful of US tech giants — leaving countries like India stranded despite relatively resilient macros. “India has not participated in the AI trade and is seen as an AI loser. We may need to wait for the AI hypercycle to turn for India to start attracting foreign capital again,” he wrote.
In IKIGAI's latest newsletter, he further mentions that AI has not merely outperformed but it has colonised global liquidity:
- Over 80% of the S&P 500’s gains in 2025 have come from AI-linked stocks.
- AI capex now constitutes nearly 1.2% of global GDP — already higher than the telecom capex bubble at its peak.
- AI spending contributes 40% of US GDP growth this year.
- Big Tech companies are redeploying 50–70% of EBITDA into AI buildouts — an unprecedented reinvestment cycle.
- Nvidia, now about 8% of the S&P 500, has a market capitalisation equal to ~15% of US GDP — compared to Cisco at just 5% during the dotcom peak.
- Microsoft and Amazon have already committed $100+ billion in annual AI infrastructure spending.
- OpenAI, despite projecting over $100 billion in cumulative losses, is being valued at $500 billion in private markets.
This extreme concentration, he says, has made global funds unwilling to diversify — not because India lacks fundamentals, but because the world is trapped in a once-in-a-generation momentum vortex.
In contrast, India’s mid and small caps have seen a 15-month time correction, inflows have dried up, and FIIs are significantly underweight India compared with a strong overweight position in the past.
“History is clear — even extraordinary businesses deliver poor returns when bought at euphoric valuations. And today, AI valuations are well past euphoria,” he wrote, drawing parallels to the dotcom buildout.
A Rare 15-Year Undervaluation Cycle Against EMs
Tibrewal points out that MSCI India has underperformed MSCI EM by more than 25% over the past year — the sharpest relative underperformance in 15 years. Historically, such steep gaps tend to reverse, especially once global liquidity rotates away from overcrowded trades.
He emphasises that India’s premium to EMs is now near long-term averages, and earnings expectations have reset to realistic levels after months of supply-heavy IPO markets and FII selling pressure.
Even the dollar has softened modestly and several non-US markets have shown surprising resilience — early signs that the cycle of extreme US outperformance may be peaking. At the same time, India’s fiscal position — including a projected Rs 2.2 trillion revenue slippage — is a concern but, he argues, already “in the price” and not the reason FIIs have pulled back.
What could force a reversal in flows? Tibrewal believes the trigger may not lie in India at all — but in US macro fragility.
He highlighted a set of risks that markets have largely ignored:
- US effective tariffs have jumped nearly tenfold in 2025.
- Interest costs are nearing USD 1 trillion annually, with federal debt projected to cross USD 40 trillion next year.
- Housing inventories are flashing “2008-style” warnings.
- Stagflation is no longer a theoretical risk but part of investor discussions.
He adds that because nearly 60% of US imports are intermediate and capital goods, the latest tariff shock will hit consumer inflation with a lag — creating what he calls a “2026 inflation bomb” that markets are mispricing.
Despite these stresses, the S&P 500 has made 28 new all-time highs this year — a disconnect Tibrewal sees as unsustainable. “When the hype cycle deflates the Mag-7, China/Korea/Taiwan and numerous other trades will unwind,” he says. That unwinding, he argues, is what could finally reopen the door for EM allocations, including India. As an early sign of global rotation, for the first time since 2006, even European equities have outperformed US equities in dollar terms, with MSCI Global ex-US returning ~25% this year versus ~13.7% for the S&P 500. This, he suggests, is a small but meaningful crack in the dominance of the AI-led US trade.
Tariff talks and Gold wealth effect: Two domestic wild cards
Apart from global triggers, Tibrewal spots two under-appreciated domestic catalysts. One is, India’s tariff negotiations with the US — the country currently faces the highest tariff incidence among major economies, and any rollback “is not priced in.”
Tibrewal also highlighted the $1 trillion wealth gain for Indian households from this year’s unprecedented 50% rally in gold prices. While much of this may remain a store of value, Tibrewal notes it can still create a consumption uplift at the margins.
Despite a challenging year for markets and modest underperformance against benchmarks, Tibrewal believes the backdrop for the next leg of compounding is falling into place.
With valuations moderate, expectations reset, domestic flows steady, and India relatively insulated from global volatility, he says the next 1 to 2 quarters offer an attractive opportunity to raise equity allocations — especially in mid and small caps where earnings visibility remains strong.
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