Whalesbook
India's Market Underperformance and Currency Woes
Christopher Wood, global head of equity strategy at Jefferies, has voiced concern over India's surprising market performance in 2025. While global markets, particularly those tied to artificial intelligence (AI) capital expenditure, have seen robust growth, India has experienced significant underperformance relative to its Asian and emerging market peers. This sideways movement of the Indian market was anticipated by Wood, but the extent of the Indian rupee's weakness caught him off guard.
The Unexpected Rupee Slide
The weakening of the rupee has been a key contributor to India's relative underperformance. Wood noted that domestic flows have largely absorbed the supply of currency, a scenario he expected. However, the depreciation beyond ₹89 to the dollar, a level he considered a potential destabilizing point, was not foreseen. He expressed uncertainty regarding whether this currency slide is a deliberate policy choice by policymakers, highlighting the unexpected nature of the move.
AI Trade and India's 'Reverse' Role
Looking ahead to 2026, Wood suggests that India's market performance will be less influenced by domestic economic factors and more by the trajectory of the global AI trade. Ironically, India has become a hedge against the AI trade's potential downsides, leading Wood to label it the 'reverse AI trade'. Investors are reportedly buying into India as a safeguard should the AI boom falter. He anticipates that by mid-2026, markets will demand clearer evidence of returns from AI-driven investments, potentially benefiting countries like Korea and Taiwan, which are heavily geared into the AI ecosystem.
Sensex vs. Nifty and Future Outlook
Wood also touched upon the diminishing relevance of the Sensex compared to the Nifty, attributing it to the Nifty's larger constituent base and the influence of Gift Nifty futures. For 2026, he hopes for a cyclical pickup in India's earnings and growth. He believes that if the Sensex can achieve a cyclical upswing and earnings growth, it could reach his long-term target of 100,000, potentially delivering another 10-15% return from current levels. Despite currency uncertainties, he remains fundamentally bullish on gold and gold mining stocks.
Final Takeaway for Investors
Wood's final message for investors underscores India's unique position as the 'reverse AI trade'. The primary uncertainty lies with the currency, but he suggests that a stabilization in the rupee coupled with improved economic growth could enable India to deliver respectable investment returns in the coming year.
Impact rating: 7/10
Difficult Terms Explained:
- AI Trade: Refers to investments and economic activity driven by artificial intelligence technology, including hardware, software, and services. This encompasses significant capital expenditure by companies developing or utilizing AI.
- Emerging Markets (EM): Countries with economies that are in the process of rapid growth and industrialization, but are not yet fully developed. They often offer higher growth potential but also higher risk.
- Capital Expenditure (CapEx): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment. In the context of AI, this refers to investments in computing power, data centers, and AI-specific hardware.
- Currency Weakness: When a country's currency loses value relative to other currencies. This makes imports more expensive and exports cheaper, and can impact foreign investment flows.
- Domestic Flows: Investments made by entities within a country, such as pension funds, insurance companies, and retail investors, as opposed to foreign investment.
- Reverse AI Trade: A situation where investors buy an asset (like India) as a hedge or alternative because they are concerned about the risks or potential downturn of another dominant trade (like AI). India is seen as an 'anti-AI' play in this context.
- Cyclical Pickup: An improvement in economic activity or company earnings that follows a pattern of expansion and contraction in the business cycle.
- FII (Foreign Institutional Investor): An investor or investment institution established in a foreign country, making investments in domestic markets.
- Real Rates: The interest rate of a financial instrument minus the inflation rate. Positive real rates generally indicate that the return on an investment is outpacing inflation.
- Private Equity Exits: When private equity firms sell their investments, often through an IPO or sale to another company, to realize profits. This can lead to currency outflows.