AI retreat fuels India stock comeback in great rotation trade

In the first nine months of the year, Indian stocks faced significant losses as the AI sector attracted global investor capital. However, the unwinding of this strategy has led to a rebound in the country's equities. The MSCI India gauge has risen 11% from a six-month low in October, adding more than $400 billion in value and nearly erasing this year's losses. This turnaround is attributed to India's relative lack of AI exposure, making it an advantageous market for global funds.

Investors have grown more positive about India's equity market due to decreasing oil prices and accelerating earnings growth. Tan Altundag, an investment manager for emerging equities at Pictet Asset Management, stated that his firm has increased exposure to India in recent weeks, seeing an improving balance between macro headwinds, portfolio flows, and valuations.

The bounceback in Indian shares over the past month highlights a broader rotation by global funds away from crowded tech bets towards markets with strong earnings.

The resurgence in Indian stocks is primarily driven by overseas investors, with a net $8.5 billion of Indian shares being purchased in November, marking the largest monthly inflow in six years. This has reduced this year's total outflow to around $22 billion. Active long-only funds globally remain $74 billion underweight on Indian shares compared to the benchmark, nearing their lowest level since 2015.

Earnings for Nifty 50 Index companies are expected to grow approximately 18% year-on-year in the September quarter, up from 13% growth in the previous three months. US-based Calamos Investments has increased its India allocation to over 10% over the past three to four months, citing improved fundamentals and attractive valuations as key factors.

Kabouter Management LLC, another overseas investor, remains constructive on India's long-term outlook, noting that valuations have become more attractive, particularly in certain market segments.

Despite the recent rally in Indian stocks, the market continues to lag behind its regional benchmark, with the MSCI India gauge down 2.2% this year, while the regional index has risen about 12%. The market is on track for back-to-back underperformance against its regional peer for the first time since 2020. While Fidelity Investment Management is cautiously optimistic, it is not rushing back into the market, slowly increasing exposure to India, particularly through financial stocks.