In the first nine months of this year, the artificial intelligence boom siphoned global investor capital away and dealt a heavy blow to Indian stocks. Now, as that trade begins to reverse, Indian equities have vaulted back to become one of the world's best-performing assets.
The MSCI India Index has rebounded 11% since touching a six-month low in October, adding more than $400 billion in market value and nearly recouping all of this year's losses. India's relatively low exposure to the AI industry has now turned into a significant advantage. With oil prices retreating and corporate earnings growth accelerating, global funds are also growing increasingly optimistic about this $5.4 trillion stock market.
"Our view on the Indian market has turned positive, and we have rebuilt exposure in recent weeks," said Tan Altundag, an emerging market equity investment manager at Pictet Asset Management in Hong Kong. "We see the balance between macroeconomic headwinds, portfolio fund flows and valuations improving." He also noted that "investors seeking to diversify away from increasingly volatile AI bets could also benefit the Indian market."
The rally in Indian stocks over the past month shows that global funds are rotating away from crowded technology shares toward markets with strong earnings. This shift signals a potential turning point for emerging markets as a whole, testing whether the world's fastest-growing major economy can reclaim its position as the preferred alternative to U.S. technology giants after lagging global peers for months.
The return of overseas investors has underpinned the Indian market's rebound. Given that global funds remain significantly underweight Indian stocks, there may still be room for further inflows. Data shows that overseas investors net bought $8.5 billion of Indian shares in November, with monthly inflows on track to be the highest in six years. That has brought total net outflows so far this year down to about $22 billion.
Bank of America data shows that global active long-only funds are underweight Indian stocks by about $74 billion relative to benchmark indexes, close to the lowest allocation level since the bank began tracking this data in 2015. Bank of America data also shows that earnings for Nifty 50 constituents may have grown about 18% year-on-year in the quarter ended September, accelerating from 13% growth in the previous three months.
U.S. investment management firm Calamos Investments is among the institutions increasing its holdings of Indian stocks. Nick Niziolek, the firm's co-chief investment officer, said that over the past three to four months, its emerging market strategy has raised its allocation to Indian equities from as low as about 1% to 2% a year ago to more than 10%. "We are adding to Indian stocks because we see an earnings inflection point," he said. "Fundamentals are improving, and valuations are very attractive."
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