Indian stocks experienced significant declines during the first nine months of this year as global investors concentrated capital in artificial intelligence-related deals. However, moving away from this strategy has turned the assets of the Asian country into world market leaders.
The MSCI India Index recovered 11% from its six-month low in October, adding over $400 billion in value and nearly offsetting losses for the year. India's advantage stemmed from its relative lack of participation in the AI trend. Global funds have also become more optimistic about the $5.4 trillion Indian stock market amid falling oil prices and accelerating profit growth.
Tan Altundag, Emerging Markets Investment Manager at Pictet Asset Management in Hong Kong, noted that they have become more positive about India and increased their stake in recent weeks. He stated that there is an improvement in the balance between macroeconomic difficulties, portfolio flows, and valuations, and that diversification away from the increasingly volatile AI trend is likely to benefit India.
The recovery of Indian stocks over the past month demonstrates a broader trend among global funds—a shift away from overheated tech bets towards markets supported by strong earnings growth. This shift may signal a potential turning point for emerging markets overall, testing the ability of the world's fastest-growing major economy to regain its status as a primary alternative to American tech giants after months of lagging behind global peers.
The return of foreign investors has been the foundation for the rise in Indian stocks, and this process may continue as global funds remain largely underinvested. According to Bloomberg data, foreign buyers acquired a net amount of Indian stocks worth $8.5 billion in November, marking the largest monthly inflow in six years. This helped reduce the total annual outflow to approximately $22 billion.
Bank of America data shows that active long-term funds worldwide remain underinvested in Indian stocks by $74 billion relative to the benchmark, which is the lowest positioning since the bank began collecting data in 2015. Furthermore, Bank of America data indicates that the profits of companies in the Nifty 50 index could grow by approximately 18% year-on-year in the September quarter, accelerating compared to the 13% growth in the previous three months.
Among those increasing their holdings is the American company Calamos Investments. Nick Niciolek, the firm's co-chief investment officer, reported that the emerging market management strategy raised their stake in India from 1% about a year ago to over 10% in the last three to four months. He explained this by saying, 'We are adding to India because we see a turnaround in earnings. We are observing an improvement in fundamentals and seeing truly attractive valuations.'
Another foreign investor becoming more positive is Kabouter Management LLC. Nihil Rastogi, a portfolio manager at this Chicago-based firm, stated that as long-term investors, they maintain a constructive view on India's prospects. He emphasized that despite the challenges of the last two years, these obstacles do not change the long-term picture, and some global changes are working in India's favor, making valuations that seemed high two years ago more attractive, especially in certain market segments.
According to Bloomberg, the MSCI India Index trades at a price-to-earnings ratio of about 20 times forward earnings, which is below its five-year average. The recent drop in oil prices also benefits Indian stocks, as the country imports nearly 90% of its energy needs. The global Brent crude benchmark fell more than 18% from its peak on October 30th, as investors anticipate that the Democratic Party's victory in the US Congress in the November midterm elections increases the likelihood of an end to the Middle East conflict.
Lauren Hislop, an investment manager at Britain's Mattioli Woods, stated that she is comfortable holding positions in India as long as the Brent price remains at $100 per barrel or lower.
Despite the recent rise in Indian stocks, the market still lags behind 2026. The MSCI India Index has still declined by 2.2% this year, while the index provider's regional benchmark has risen by approximately 12%. According to Bloomberg, the Indian indicator is on a trajectory of two consecutive years of undervaluation compared to its regional counterpart for the first time since 2020.
Fidelity Investment Management is generally positive about India but is not rushing to return. Nick Price, a portfolio manager for emerging markets at Fidelity in Hong Kong, reported that they slightly reduced their underinvestment in India in recent weeks by selling some AI-related stocks. He clarified that there is no rush, and the stake in India remains low but may grow slowly and thoughtfully, especially through financial stocks. Simon Sidmalm, a fund manager at Tundra Fonder AB in Stockholm, noted that with the retreat from AI deals, interest in India has revived, and they continue to hold stocks they see as having long-term fundamental growth potential.
