By Craig Mellow
With most of the financial world emphatically zigging one way, the artificial-intelligence way, India's zag could prove welcome in 2026. Or not.
"If you're looking to diversify your portfolio from the S&P 500, India has basically zero correlation," says Matt Orton, head of market strategy at Raymond James Investment Management.
That has been a minus this year, as investors fled for the tech-forward emerging markets of China, Taiwan, and South Korea. The iShares MSCI India exchange-traded fund has been flat in 2025, while global emerging markets soared by 30%.
The 50% tariff that President Donald Trump levered on Indian exports to the U.S., and a rupee that has sagged by 5% against the dollar, haven't helped matters. "Clients are asking us: Is India still an investment we need to consider," says Dina Ting, head of global index portfolio management at Franklin Templeton.
Her answer is yes, in the long term.
A number of domestic stars are aligning for a better 2026. Underperformance has made India's notoriously expensive stocks cheaper. Ting calculates that the market is trading at 23.5 times earnings, off from a five-year average of 27.
Prime Minister Narendra Modi and the Reserve Bank of India are pitching in to juice the economy. A simplification of the national goods and services tax, plus 125 basis points in interest-rate cuts to 5.25%, have pushed the RBI's growth estimate from 6.5% to 7.2% for this fiscal year.
That's pulling India Inc. out of an earnings slump, says Peeyush Mittal, an India-focused portfolio manager at Matthews Asia. "Our expectation is for earnings growth to improve at the top 200-300 companies," he says.
Mittal also reports "chatter" about a potential cut in the tax on long-term capital gains, currently an effective 15%.
Trump's beef with Delhi isn't keeping U.S.-domiciled hyperscalers from (prospectively) buying into the AI future of 1.4 billion mostly under-30 Indians. Alphabet, Microsoft, and Amazon.com have pledged a joint $68 billion in AI-related investment over the past few months. Those flows could bolster the rupee.
"U.S. companies making investments is more important than the tariffs," says Jon Harrison, managing director for emerging markets at TS Lombard.
Orton's top two stock picks in India are No. 1 private bank HDFC, which is "starting to look more like U.S. banks with a vertical capture of the consumer's wallet," and auto maker Mahindra & Mahindra, whose sales of high-margin sport-utility vehicles are booming.
He's sniffing for value in information-technology service providers like Tata Consultancy Services, whose shares have cratered nearly 30% this year on anticipation that AI will cut into revenue. "TCS is geared for margin improvement," he says. "It's worth a look."
None of that may matter much if global AI-mania continues. Chinese stocks remain much cheaper than India's on average, with many more names on the technological cusp, points out TS Lombard's Harrison.
"The natural thing to do is take profits in India," he says. "Our base case is for the same relative performance next year."
India's trade feud with Washington will continue to weigh on sentiment if not gross domestic product, Ting adds. "A 50% tariff is not sustainable," she says. Modi's recent welcome of Russian President Vladimir Putin to Delhi, proclaiming the two nations' "deep and unbreakable relationship," may not melt the ice with Trump.
If AI enthusiasm sputters, though, good old reliable, 7%-growing India may not look so bad again.
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(END) Dow Jones Newswires
December 12, 2025 21:31 ET (02:31 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
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