Market Pulse: Jefferies Discusses India’s Contrarian Position in the Global AI Landscape with ‘Reverse AI Trade’
India has recently found itself categorized as the “reverse AI trade” among emerging markets, following a notably weak performance this year. Despite strong domestic investment inflows that have mitigated a more severe decline, the country has underperformed the MSCI Emerging Markets Index by 27 percentage points in 2025. The Indian rupee has also depreciated by 3.4% against the dollar, highlighting the stark contrast with AI-driven valuation increases seen in other markets like Taiwan, Korea, and China.
According to Chris Wood, the global head of equity strategy at Jefferies, India’s position in the emerging markets landscape has shifted dramatically. The country has lagged significantly behind its peers, with a 27 percentage point deficit compared to the MSCI Emerging Markets Index. This underperformance is attributed to the dominance of AI-driven growth in markets such as Taiwan, Korea, and China, which collectively account for a substantial 61.8% of the index. In contrast, India holds a mere 15.3% weight in the same index. Wood describes India as the “reverse AI trade,” suggesting that if the AI market experiences a correction, India may benefit and potentially outperform its counterparts.
Domestic Investment Resilience Amid Foreign Withdrawals
Despite being the weakest performer among emerging markets, India has managed to avoid a full-scale market selloff. This resilience can be largely credited to aggressive buying from local investors. In October alone, equity mutual funds recorded net inflows of $3.6 billion, contributing to a total of $42 billion in domestic inflows from January to October. On average, monthly inflows reached $7.4 billion in 2025, effectively counterbalancing new equity issuance of $5.7 billion per month. Conversely, foreign investors have withdrawn approximately $16.2 billion this year, nearing record levels. Despite these outflows, the Indian market has not experienced the severe corrections typically associated with such foreign exits.
Economic Indicators and Currency Stability
Jefferies analysts, including Wood and Mahesh Nandurkar, indicate that several macroeconomic indicators suggest the Indian rupee may have stabilized around the 89 mark. They anticipate that monetary easing, credit growth, and recent reductions in the Goods and Services Tax (GST) rate will stimulate economic activity and nominal GDP in the upcoming quarters. This stabilization of the rupee is crucial as it reflects broader economic health and investor confidence in the Indian market.
Sectoral Shifts and Future Outlook
The Indian IT sector has faced significant challenges due to the ongoing AI transition, with revenue growth slowing to just 4% for FY25. The second quarter of FY26 saw a mere 1.6% year-on-year growth. As a result, sector valuations have compressed, with the BSE IT Index trading at a forward price-to-earnings ratio of 23x, down from 31x the previous December. However, while traditional IT services are cooling, global capability centers (GCCs) based in India are gaining importance in the services export landscape. Additionally, Indian real estate developers are being viewed as attractive investments, with many trading below long-term valuation benchmarks. Despite the challenges, Wood emphasizes that India’s structural story remains compelling, especially if the AI rally in North Asia begins to cool.
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