The Transition of Investment Capital: India’s Potential Resurgence
The fervor surrounding artificial intelligence (AI) investments may be waning, and this development could present an advantageous scenario for India.
As trepidations rise regarding the sustainability of the AI stock surge, global capital is anticipated to shift from major players on Wall Street—primarily the so-called “Magnificent Seven”—and from markets in China and South Korea towards emerging contenders like India.
Such a transition could rejuvenate the Nifty50 index, which has seen lackluster performance throughout much of 2025, as foreign investments have predominantly gravitated towards semiconductor and technology firms in Taiwan and South Korea.
AI Boom or Illusion?
Concerns about the current AI enthusiasm were notably echoed by Google’s CEO, Sundar Pichai, who acknowledged an element of “irrationality” in the market. He indicated that no company is safeguarded against potential fallout should this speculative bubble burst.
Amazon’s founder, Jeff Bezos, further amplified these concerns, categorizing the current wave of AI investments as an “industrial bubble” and cautioning that a significant portion of the capital involved may end up being squandered.
Additionally, Sam Altman, the CEO of OpenAI, conceded last month that certain aspects of AI technology exhibit “bubbly” characteristics.
Such warnings have not gone unnoticed by astute investors. Billionaire visionary Peter Thiel has liquidated his entire stake in preeminent chipmaker Nvidia, reflecting anxiety over a burgeoning tech bubble rooted in AI investments, as recent regulatory disclosures reveal.
Meanwhile, the infamous Michael Burry, who gained notoriety for his prescient shorting of the U.S. housing market in 2008, is now placing bearish bets against various AI firms, including by acquiring put options on nearly one million Nvidia shares.
“Should the AI bubble deflate in a structured manner, we might witness a marked outflow of investments from South Korea and Taiwan, along with an uptick in foreign purchases of Indian equities,” suggested Alex Redman of CLSA.
He cautioned, however, that the AI sector is teetering on the brink of a bubble, with “eye-watering commitments” threatening to dilute investor returns.
Throughout the previous year, a significant amount of capital that historically flowed into India has been redirected towards South Korea and Taiwan, as international investors pursued opportunities presented by the AI trend over the past 12 to 18 months.
Foreign Institutional Investment Flows
Elara Securities’ analysis reveals that Taiwan accounted for 15% of total fund flows in 2025, a notable increase from its average share of 12.4% during historical cyclical peaks since 2010.
Conversely, India’s share plummeted to a mere 0.4% at the peak in November 2024, starkly contrasting with an average of 6.3% during the prior seven fund flow peaks since 2010.
This trend is mirrored in the United States, which has captured an outsized portion of foreign fund inflows in the aftermath of the COVID pandemic. U.S. investments peaked at 88.6% in November 2024, compared to an average share of 23% during previous fund flow peaks.
Chris Wood of Jefferies referred to India as indicative of the “reverse AI trade.” He posited that India should experience relative outperformance if the AI trend experiences a significant correction, adversely impacting Taiwan, Korea, and China in that sequence.
Vikash Kumar Jain of CLSA Investment similarly advised that should AI be in bubble territory, opportunities that are less intertwined with AI dynamics would be more prudent, suggesting India’s market could offer attractive prospects.
Distinct from the U.S., where titans such as Nvidia and the “Magnificent Seven” dominate market valuations, or from counterparts in the Asia-Pacific region like Taiwan’s TSMC and South Korea’s Samsung, India’s market lacks a substantial presence of pure-play AI stocks.
The Nifty50 and Sensex indices are largely influenced by traditional sectors such as financial services, consumer goods, infrastructure, and manufacturing, thus insulating India from AI-centric corrections.
Burry underscored that as tech giants like Microsoft, Google, Oracle, and Meta invest substantial sums into Nvidia’s chips and servers, they may also be discreetly extending depreciation timelines to present an artificially robust earnings outlook—a potential indicator of inflated valuations.
“India’s relative valuation compared to other emerging markets is nearing its long-term average, albeit still not there yet,” Jain noted.
“Thus, on a relative scale, it remains competitively priced against its peers, and encouraging headlines signal positive movement.”
Garima Kapoor at Elara Securities highlighted that a prospective unwinding of AI investments—although anticipated to take some time—could catalyze a shift towards underweighted sectors such as Indian financials.
With nominal GDP showing signs of recovery and small- to mid-cap stocks exhibiting a strong correlation with this growth, India stands to benefit from sectoral rotation as global AI momentum subsides.
Furthermore, the analysis indicates that global equity flows have evolved from broader emerging market engagement in 2013 and 2018 to increasingly concentrated cycles influenced by dollar and Fed policies, particularly within the tech sector from 2020 to 2025. If the AI trade falters, analysts predict outflows from Taiwan and China could redirect towards India.
Despite these opportunities, risks persist. The IT sector remains vulnerable to disruption from AI technologies, with export growth stagnating and sector multiples cooling.
Additionally, currency fluctuations associated with ongoing state-level financial aid present potential challenges, particularly given the political developments in jurisdictions like Bihar.
In light of these complexities, India stands out as a market poised to harness the benefits of any deflation in AI trades.
Should AI valuations experience a modest correction of 10-20%, Indian markets may emerge as a favored destination for global capital seeking refuge from exorbitant tech valuations.
A reversal in foreign institutional investment flows could herald a pivotal moment for Indian equities, transforming recent underperformance into a trajectory of future success, as the global investment landscape realigns.
Source link: M.economictimes.com.
