BlackRock Reveals: Why India's Market is Lagging NOW & AI's Surprising Global Impact!

BlackRock's latest "Pushing Limits" Global Outlook report indicates that Indian equities have recently lagged behind global and emerging market peers. This underperformance is attributed to several external and internal factors that investors are closely watching.

Recent Performance and Challenges

• Indian stocks are facing near-term headwinds from external pressures, including volatile oil prices and a strong US dollar, alongside a general global risk-off sentiment.
• Investor flows have shifted towards markets more directly associated with the Artificial Intelligence (AI) theme, such as South Korea and Taiwan.
• Domestically, regulatory tightening by the Securities and Exchange Board of India (SEBI) in the derivatives market has also contributed to a cooling of activity.
• Geopolitical frictions involving the United States have also played a role in moderating growth perceptions.

India's Long-Term Strengths

• Despite the recent lag, Indian equities have shown remarkable strength over a longer period, delivering nearly 80 per cent returns in US dollar terms over the past five years, outperforming broader global and emerging markets.
• India's forward price-to-earnings ratio, while above emerging market averages, is supported by a stronger nominal growth outlook for the economy.
• BlackRock estimates India’s equity risk premium to be around 4.3 per cent, close to its long-term average, indicating a reasonable valuation given growth and interest rates.
• The nation's improving macroeconomic stability and credit quality offer valuable income and diversification benefits at a time when developed market bonds are less attractive.
• India's economy represents about 7 per cent of global GDP, while its equities form roughly 1.7 per cent of the MSCI ACWI index, suggesting potential for growth in market representation.

The AI Revolution

• Unlike the dot-com bubble of the 1990s, leading AI-linked companies today are generating substantial revenues, cash flow, and earnings, consistently exceeding market expectations.
• Ben Powell, Chief Middle East and APAC Investment Strategist at BlackRock Investment Institute, noted that these are "real companies making amazing amounts of money," suggesting a fundamentally strong basis for the AI boom, even if valuations are debatable.
• BlackRock anticipates that the earnings strength driven by AI momentum will continue into 2026, with opportunities expanding beyond US mega tech stocks to become more global.

AI Buildout Constraints and Financial Risks

• The expansion of AI infrastructure in the US faces significant constraints, particularly in compute power and energy supply, with energy being the most critical bottleneck.
• By 2030, AI data centers could consume 15-20 per cent of the current US electricity demand, posing a considerable challenge to the power grid and related industries.
• BlackRock holds a bearish view on long-term US Treasury bonds, warning that the significant financing required for AI buildout could drive up US borrowing costs and heighten concerns about government debt.

Impact

• This analysis from BlackRock provides critical insights for investors assessing India's market positioning. It highlights the need to balance short-term challenges against long-term structural advantages. The AI theme's global dynamics and potential energy constraints could influence investment flows and sector performance worldwide. Concerns over US government debt and borrowing costs might affect global financial stability.
• Impact Rating: 8/10

Difficult Terms Explained

• Equities: Shares of ownership in a company.
• Emerging Markets: Countries with developing economies that are undergoing rapid growth and industrialization.
• Derivatives: Financial contracts whose value is derived from an underlying asset, like stocks or bonds.
• Geopolitical Frictions: Strained relations or conflicts between countries.
• Risk-off Sentiment: A market attitude where investors prefer lower-risk investments due to uncertainty.
• Price-to-Earnings Ratio (P/E Ratio): A valuation metric comparing a company's share price to its earnings per share.
• Equity Risk Premium: The excess return investors expect to receive for holding risky equities over a risk-free asset.
• MSCI ACWI Index: An index representing large and mid-cap stocks across 23 developed and 70 emerging markets.
• GDP (Gross Domestic Product): The total monetary value of all finished goods and services produced within a country in a specific period.
• AI-linked Companies: Businesses whose products or services are directly involved with or benefit from Artificial Intelligence technology.
• Compute: The processing power required for calculations and data operations, especially in computing and AI.
• US Treasuries: Debt securities issued by the U.S. Department of the Treasury, considered very safe investments.