Whalesbook
AI Boom Shifts Investor Focus Away From India
Foreign capital is expected to stay away from Indian stock markets through 2027, BofA Global Research predicts. The firm points to a key difference: India is seeing its earnings forecasts lowered, while markets like South Korea and Taiwan are getting upgrades thanks to investments in artificial intelligence. This contrast suggests global investors may remain on the sidelines for a prolonged period, with a possible return not expected before 2027 or 2028.
Persistent Selling Amidst AI Optimism
Indian stocks have performed poorly compared to global markets this year. A record $23 billion in foreign selling has been made worse by a falling rupee, as international money flows towards AI opportunities in other Asian countries. BofA Global Research forecasts about 8.5% earnings growth for companies in the NSE Nifty 50 Index for the fiscal year ending March 2027. This is a slight increase from an estimated 7% for the current fiscal year. Amish Shah, India research head at BofA, described this as "low growth on a low base for India," a sharp contrast to the strong earnings growth seen in South Korea and Taiwan.
High Valuations and Economic Challenges
Even after a recent 9% drop, the Nifty 50 index is still trading at a premium, about 18 times its one-year forward earnings. This valuation is much higher than South Korea's benchmark index, which trades at a lower 7.5 times earnings and has become the world's best-performing stock market this year. BofA had previously warned about rising stagflation risks in India, partly due to its reliance on imported energy and the ongoing conflict in West Asia. Rupee depreciation is also seen as a lasting structural problem for India's economy.
Domestic Support and Future Triggers
While foreign investment is currently low, BofA's outlook indicates that its return depends on geopolitical tensions in West Asia easing and the AI capital expenditure cycle peaking. Until then, domestic investors are likely to continue focusing on Indian mid- and small-cap stocks, offering some support to the local market. South Korea's Kospi, for example, has shown strength and significant gains thanks to its technology sector's role in the AI boom. India's market, however, faces challenges from its heavy reliance on imported energy and inflation.