India Attracts $3.6B: Anti-AI Diversifier Sees Market Rebound

India is re-emerging as a significant portfolio diversifier, drawing global investor attention amidst the increasingly crowded AI-linked markets in South Korea and Taiwan.

This shift comes as returns from AI-focused assets begin to moderate, prompting a re-evaluation of investment strategies.

Global Investors Pivot to India

While global emerging market funds saw a combined $4 billion in inflows, with South Korea and Taiwan receiving substantial foreign capital, the “AI trade” is now considered crowded. Elara Capital warns of durability risks for these concentrated positions.

India, in stark contrast, is experiencing a moderation in persistent fund outflows, with its relative market performance showing marked improvement.

India-focused long-only funds, which faced redemptions since July 2025, have now seen withdrawals ease. These funds have outperformed their emerging-market counterparts by approximately 10% since mid-June.

Key Inflow Metrics

HSBC identifies India as an “anti-AI diversifier,” projecting potential inflows of around $25 billion. This estimate is based on over 80% of active global emerging-market funds moving from an underweight to a neutral position on India.

Foreign investors have already injected $3.6 billion into Indian equities since mid-June, propelling a 6% rise in the market during the same period. India’s market also demonstrates significantly less volatility compared to South Korea’s.

Domestic Support and Fundamentals

Robust systematic investment plan (SIP) contributions provide a strong domestic foundation. Net equity inflows into Indian mutual funds, particularly in the small-cap and mid-cap segments, are also showing recovery.

HSBC highlights improving corporate fundamentals, with 73% of companies reporting Q1 FY27 results meeting or exceeding expectations. Accelerated credit growth and resilient automobile demand further bolster the economic outlook, leading HSBC to upgrade India to “neutral” in its Asian equity strategy.

Valuations and Sector Focus

Despite demanding valuations, India’s premium relative to emerging markets has normalized, now trading near the lower end of its historical range. HSBC favors high-quality growth companies within domestic sectors.

Specific attractive areas include financials, automobiles, retail, and hospitals, with private banks and real estate also gaining appeal. However, India’s earnings-per-share growth forecasts — 14% in 2026 and 17% in 2027 — trail those of AI-linked markets like South Korea and Taiwan, which anticipate 25% and 35% respectively.

Ultimately, India’s market no longer necessitates a collapse of the AI trade for foreign investors to return. A mere slowdown in the rotation out of AI-linked assets may prove sufficient to attract global investors currently underweight on India.