India-focused equity funds have lost five years of relative gains against global emerging markets as capital moves toward AI-linked sectors in South Korea and Taiwan. Investors are seeing a shift in foreign fund flows that has brought India’s relative performance ratio back to early 2021 levels, according to Elara Securities.
The strong lead that India-focused equity funds held over other emerging market peers for nearly five years has significantly faded. Data from Elara Securities indicates that global capital is rotating away from Indian equities and toward markets like South Korea and Taiwan, which are currently benefiting from a surge in investor interest linked to artificial intelligence technology.
This shift has effectively erased the relative outperformance that Indian funds built up between early 2021 and late 2024. The ratio of India-dedicated fund performance compared to broader global emerging market funds has now fallen back to levels last seen in April 2021. For investors, this reversal highlights how global investment trends, particularly those driven by rapid growth in the AI sector, can impact capital allocation across different countries.
Impact of Global Capital Flows
While global investors have maintained a strong preference for U.S. equities, emerging markets recently experienced their first weekly inflow after a long period of selling, primarily fueled by gains in South Korean stocks. This trend has placed pressure on the Indian market. In the most recent week, India saw net outflows of $95 million. While this is lower than the average weekly exit of $400 million observed over the previous three months, it reflects a continued caution among foreign investors who are rebalancing their portfolios toward AI-heavy markets.
Historical Context and Market Valuation
From a long-term perspective, the current movement is significant. Elara Securities noted that the ratio of India’s market capitalization to South Korea’s, when measured in U.S. dollars, has dropped to support levels not recorded since 1996 and 2002. This represents one of the most intense periods of relative underperformance for India in roughly thirty years. Historically, market ratios reaching such multi-decade support levels have sometimes acted as a signal for potential turning points in relative performance.
For investors, the key monitorable remains whether the pace of outflows continues to moderate or if further rotation into AI-driven markets persists. While India’s recent market stabilization suggests the period of intense underperformance could be nearing a peak, the final direction will depend on global liquidity, the sustainability of the AI rally in competing markets, and how India’s earnings growth performs relative to its regional peers in the coming quarters.