Whalesbook
Global Funds Chase AI, Leaving India Behind
Foreign investors have kept selling Indian stocks, pulling out about $38 billion since early 2025. This has caused the MSCI India Index to lag behind regional competitors. The main reason appears to be a large shift in global money towards markets seen as leaders in artificial intelligence (AI), like South Korea and Taiwan. These countries are attracting major investments in AI and semiconductor manufacturing, expected to hit $527 billion by 2026. India's stock market, worth roughly ₹1.96 lakh crore, is currently viewed by some investors as lacking a strong AI growth story. This leads them to cut back their holdings or wait for a clearer domestic AI opportunity.
Rupee Woes and Profit Pressures
A deeper worry for foreign investors is the continued weakness in the Indian Rupee and pressure on company profits. The rupee has fallen significantly, trading around INR 93 to the US dollar. For foreign bond investors, the cost of hedging currency risk over one year has risen by up to 70 basis points due to new rules. This weaker rupee eats into returns when converted to dollars, potentially causing more investors to sell. Adding to this is the strain on company earnings. Although GDP growth is strong, company profits have not kept pace, hit by high costs, especially for oil. Even with recent drops, oil prices are still about 34% higher than a year ago. Nomura analysts warn that if oil prices stay high, earnings forecasts could be 10-15% too optimistic, leading them to lower their Nifty 50 target by 15% to 24,600.
Expensive Stocks Compared to Global Peers
Indian stocks are still more expensive than other emerging market shares. The Nifty 50's price-to-earnings (P/E) ratio is currently around 21.2x, down from about 24x in September 2024. This remains higher than the MSCI Emerging Markets Index P/E of roughly 16.3x. Although this price difference has shrunk, and India's strong governance and large market are recognized, the higher cost of hedging currency risk makes it harder for foreign investors to see value compared to other emerging economies.
AI Lure is Structural, Oil Fears are Not
Geopolitical risks connected to oil imports are mostly viewed as a temporary issue. Recent news about the Strait of Hormuz remaining open and progress on peace efforts have caused crude oil prices to drop below $90 a barrel, easing immediate supply concerns. However, oil prices are still much higher than a year ago. The lack of a clear, major domestic AI focus in India, however, is seen as a more lasting reason why global investors are shifting capital elsewhere. While India is strong in IT services, current investments are heavily focused on AI hardware and chip manufacturing, an area where other Asian countries are currently seen as leading.
The Case for Further Sell-offs
The argument for Indian stocks to fall further relies on continued currency weakness and the rising cost of hedging the rupee. This can make bond investments unappealing and stock returns jumpy. A significant risk is the possibility of more downgrades to company profit forecasts, especially if oil prices rise again or demand weakens. While other emerging markets have seen foreign money return after initial selling, India has continued to experience net outflows. This shows investors are favoring other markets due to the AI trend and higher costs. The market's current drop of about 15% suggests a broad market correction, not just a shift between industries, signaling that foreign investors are broadly avoiding risk.
Long-Term Outlook Remains Positive
Despite current challenges, India's long-term growth potential is a major positive. Forecasts show India becoming the world's third-largest economy by 2028. Better economic signs and a focus on local demand, backed by government steps, should boost company profits from the second half of 2026. Foreign investors may still react to short-term economic news and global money movements, but India's strong fundamentals – like its young population, clear regulations, and deep market – should keep it attractive to investors looking long-term. Current stock prices, though still high, are nearing levels that have often led to recoveries, suggesting chances for patient investors.