AI retreat fuels India stock comeback in great rotation trade

Indian stocks have staged a remarkable comeback in 2026 after suffering significant losses in the first nine months of the year due to the excessive focus on the artificial intelligence (AI) sector. The MSCI India gauge, which tracks the performance of the country's largest companies, has rebounded 11% from a six-month low in October, adding over US$400 billion in value and almost erasing this year's losses.

This turnaround is largely attributed to the relative lack of AI exposure in India compared to other markets, making it an attractive alternative for global investors.

The resurgence in Indian equities reflects a broader rotation by global funds away from crowded tech bets towards markets with strong earnings growth. This shift is a positive sign for emerging markets as a whole, as it suggests that the world's fastest-growing major economy may reclaim its status as a premier alternative to US tech giants. The increased domestic growth and improving fundamentals have also contributed to the optimism surrounding India's economic prospects.

Overseas investors have played a crucial role in driving the rebound in Indian stocks. The inflow of foreign capital has reached a six-year high, with net purchases of Indian shares totaling US$8.5 billion in November alone. This has helped reduce the year's total outflows from Indian equities to about US$22 billion. Bank of America data indicates that global funds remain underweight in Indian shares, with long-only funds globally holding US$74 billion less exposure than the benchmark.

Several international fund managers have recently increased their exposure to Indian equities, citing improved earnings growth and attractive valuations. Calamos Investments, for example, has boosted its India allocation to over 10% from a mere 1-2% just a year ago, while Kabouter Management remains constructive on the long-term outlook for India.

Even established players like Fidelity Investment Management are cautiously optimistic, noting that while India remains underweight in their portfolio, exposure could rise gradually through value-focused investments.