India's stock market has seen its appeal steadily decline this year.
According to data from India's National Securities Depository Limited, as of June 1, the total net investment by foreign portfolio investors in local Indian equities stood at 7.3 trillion rupees, marking the lowest level since 2016. This figure aggregates the annual investments or withdrawals by foreign investors in Indian stocks since 1993.
Concurrently, the South Korean stock market has surged, led by semiconductor giants. By the close on June 2, the KOSPI index had risen 104% this year, with a market capitalization exceeding $5 trillion, successfully surpassing India to become the world's sixth-largest stock market. India's total market capitalization has retreated to $4.8 trillion, dropping to seventh place globally.
India Loses Favor
Strategist Balasubramanian from JM Financial Institutional Securities, a leading domestic integrated financial services firm, noted in a report that the shareholding proportion of global funds in listed Indian companies has declined from nearly 20% about a decade ago to the current 15%.
Why has the once highly sought-after "India story" suddenly fallen out of favor?
The direct impact of the artificial intelligence (AI) technology revolution on India's traditional economic model is a primary reason. India's IT services sector, a source of pride with annual revenue of about $315 billion and a 65% share of the global software outsourcing market, is facing challenges. The proliferation of generative AI tools is automating a vast amount of basic programming, testing, and maintenance work, fundamentally shaking its "selling services per head" business model.
Carson Block, founder of Muddy Waters Capital, warned that AI could replace up to 15% of high-paying knowledge-based jobs in the US within a few years. Given India's heavy reliance on knowledge-based service exports to the US, this trend will have a profound impact.
Strategists like Sanjeev Prasad from Kotak Institutional Equities stated bluntly that India has "almost no exposure" to the current sustained upcycle in the AI and semiconductor industries. They expect short-term corporate profit growth in India to lag behind other resource- and technology-led emerging market peers.
Geopolitical conflicts and the ensuing energy crisis have exposed another major weakness in the Indian economy. As the world's third-largest oil importer, India relies on overseas sources for approximately 80% of its oil and gas. Conflicts like those between the US and Iran have pushed up oil prices and threatened key shipping lanes, leading to a sharp increase in India's import costs, a widening trade deficit, and significant pressure on the rupee. Since late February, the rupee has depreciated nearly 5% against the US dollar.
For foreign investors, investing in the Indian stock market not only carries market volatility risk but also faces the double whammy of "stock market decline + currency depreciation," which severely erodes the final dollar-denominated returns.
Furthermore, policy environment volatility and infrastructure shortcomings further diminish India's appeal.
International investment banks are becoming more cautious about the outlook for Indian equities. Goldman Sachs has downgraded its rating on Indian stocks from overweight to neutral and lowered its Nifty 50 target to 25,900 points, citing intensifying macroeconomic headwinds, significantly weaker earnings growth, and high valuations. Even if oil prices fall, foreign capital is unlikely to rush in to "buy the dip" – during the oil price correction in early April, foreign capital did not return on a large scale, and the visibility of an earnings recovery remains low.
The assessment from Bank of America Global Research is more direct. Amish Shah, head of India research at BofA, stated that as Asian AI winners offer stronger profit prospects with cheaper valuations, foreign investors' selling of Indian stocks could continue into next year. He bluntly stated that global investors are unlikely to return to India "until 2027 or even 2028," adding that "it certainly doesn't look like a 2026 event." In Shah's view, India is facing earnings downgrades while other AI-driven markets are seeing upgrades, a contrast that determines the direction of capital flows.
Faced with this systematic withdrawal of foreign capital, domestic Indian funds are attempting to take over. Balasubramanian pointed out that driven by sustained inflows from retail investors, the shareholding proportion of domestic mutual funds has risen to about 20%, surpassing foreign holdings for the first time. However, whether this transfer of pricing power from international institutions to local funds can support a vast market with a total capitalization nearing $5 trillion and maintain its position in global asset allocation remains a significant question.
South Korea's Surge
While the Indian market faces selling pressure and evaporating market value, the South Korean stock market is experiencing a massive AI-driven wealth creation boom.
Data compiled by Bloomberg shows that the total market capitalization of South Korean listed companies has soared 86% this year to $5 trillion. As of June 2, South Korea's market cap has officially surpassed India's $4.8 trillion, rising to become the world's sixth-largest stock market.
In less than six months this year, South Korea's stock market has successively surpassed Canada, Germany, the UK, France, and India, jumping five places to rank sixth globally. Year-to-date, the KOSPI index has gained over 104%.
The core engine driving this South Korean market rally is undoubtedly the two memory chip giants, Samsung Electronics and SK Hynix. Market analysis widely believes that the "explosive" application of AI technology has spurred explosive demand for high-bandwidth memory (HBM), a field where South Korean semiconductor leaders hold globally leading production capacity.
The latest report from market research firm TrendForce shows that Samsung Electronics and SK Hynix together hold about 80-90% of the global production capacity for the next-generation HBM4, with their 2026 high-end memory product capacity already fully booked by global tech companies. Consequently, Samsung Electronics reported a nearly 8-fold year-on-year increase in operating profit for the first quarter of 2026, while SK Hynix saw operating profit grow over 4-fold. This explosive earnings growth has directly fueled a surge in their stock prices.
Beyond industry tailwinds, the South Korean government's "Corporate Value-up Program" has also injected a strong stimulus into the market. The program, through measures like mandatory treasury share cancellation, enhancing dividend appeal, and strengthening minority shareholder protection, aims to address the long-standing "Korea discount" issue – the systematic undervaluation of companies due to poor chaebol governance. The valuation repair potential released by these reforms resonates with the semiconductor industry's supercycle.
Gerald Yeo, Chief Investment Officer at Reed Capital Partners, commented that this rally not only highlights the importance of South Korean tech companies but also reflects global capital flowing to Asian economies playing a key role in shaping the future of technology and growth.
However, behind the market cap euphoria, risks and concerns are equally noteworthy.
The most prominent issue is the extreme imbalance in market structure. The combined market capitalization weight of Samsung and SK Hynix in the KOSPI index exceeds 43%, meaning their gains almost entirely drive the index's surge.
Ross McGarry, Senior Investment Analyst at UK asset manager AVI, pointed out that this year's gains are primarily driven by the memory chip cycle. The real test lies in whether South Korea can sustain this re-rating through genuine corporate governance reforms. Once global AI investment enthusiasm cools or the memory chip cycle peaks, the South Korean market, heavily reliant on these two giants, could face severe volatility.
Excessive retail leverage is another risk that cannot be ignored. As of May 22, the margin balance of South Korean retail investors reached a record high of 36.47 trillion won, heavily concentrated in the two chip stocks, Samsung Electronics and SK Hynix.
Analysis warns that this highly concentrated leveraged configuration poses a chain reaction risk: if the stock price of one of these chip giants falls by 10%, the margin maintenance ratio could trigger the warning line set by brokerages. If this leads to forced liquidations, a chain reaction could further exacerbate the stock price decline.
Another danger signal is the "handover" in capital flows. Despite the stock market repeatedly hitting new highs, foreign capital is quietly retreating.
According to a May 27 report by The Korea Herald, overseas investors have sold a cumulative total of approximately $63.8 billion worth of South Korean stocks this year. Meanwhile, South Korean retail investors are pouring into the market with astonishing enthusiasm. Data shows that the number of active stock trading accounts in South Korea has exceeded 100 million, far surpassing its total population. Credit trading margin balances have hit record highs, with retail trading volume accounting for as much as 80% of the total. Historically, this pattern of "foreign capital retreating while retail investors leverage up to take over" has often been accompanied by increased market fragility.
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