As AI fatique creeps in, India has potential as an anti-AI rotation trade: CLSA’s Alex Redman

India has seen significant foreign selling over the past year and a half. Foreigners have reduced exposure to slightly below benchmark weight, a level Redman believes is close to the lowest level. “I can’t really imagine that they will go much lower than that,” he said.

India’s equity market could increasingly be viewed as a destination for global investors rotating out of overheating AI trades, according to Alex Redman, Chief Equity Strategist at CLSA.

Speaking at a media session during the CITIC CLSA India Forum, Redman said India’s recent appeal could be driven less by improving fundamentals and more by a shortage of attractive alternatives as the AI trade shows signs of fatigue.

Describing India “principally as a candidate for the sort of anti-AI rotation trade,” he said investors could return not because the market is suddenly compelling but because other large emerging markets tied to the AI boom are losing momentum. “Where else do I put my money? I’d have to withdraw it out of Taiwan, Korea, parts of China, because I think the AI trade is beginning to roll over.” With India’s broad liquid market, he noted that it is being viewed as one of the few potential destinations for capital rotating away from AI-linked markets

Redman stressed that nothing in India’s valuation profile or fundamentals has suddenly improved enough to attract investors on its own. “I don’t really believe that India’s investment appeal has improved that much over the last 12 to 18 months. It’s certainly not that much cheaper,” he said. “So it’s not so much the carrot as being the stick that would force investors to reengage,” he added.

He explained that over the past year, India has undergone a reset across GDP expectations, earnings, the currency and return on equity. Growth forecasts were revised lower after the election, as reduced political capital limited the scope for aggressive reforms. That shift pulled GDP expectations down from around 7–8% to nearer 6%, and because India is one of the few emerging markets where GDP changes translate directly into corporate earnings, EPS forecasts followed the same trajectory.

These earnings downgrades, he says appear to have bottomed, with revisions beginning to turn higher again from levels consistent with previous cycle lows outside crisis periods. The equity market, he noted, has been slower to reflect this improvement.
India’s long-standing tendency toward overly optimistic analyst forecasts also contributed to the adjustment, and Redman said much of the necessary clean-up of expectations has now happened.

Credit conditions, he added, remain comparatively resilient versus much of Asia. He added that a adjustment has also occurred in the currency as the rupee had become expensive on a trade-weighted basis after heavy RBI intervention, and the recent depreciation was “overdue.” While the basic balance points to modest depreciation ahead, bond inflows following index inclusion and India’s large reserve buffer give the RBI room to manage volatility. Redman viewed the major part of the currency adjustment as largely complete.
India’s relative ROE, he said has also softened in recent years, weighing on valuations, but forecasts indicate that the erosion is ending. Margins, he said are improving across several sectors, and India still offers relatively high ROE across most industries compared with the rest of emerging markets, aside from energy.

Foreign investors, meanwhile, he added have significantly reduced exposure over the past 18 months and now sit slightly below benchmark weight. Redman said it is difficult to see them going much lower. Domestic inflows continue to offer strong support, with systematic investment plans pulling in steady contributions. Retail investors, who typically track market momentum, have continued buying despite softer performance.

On where these anti-AI flows could benefit India, Redman said that if global investors rotate out of overstretched AI trades, India’s rate environment and domestic macro setup will influence where those flows land within the market. “Obviously we're going through a rate-easing cycle here as we are across a lot of emerging markets. Inflation in India is perhaps more benign than anticipated. That gives the RBI more latitude to cut,” he said.