Market pulse: Is India the contrarian bet against the global AI frenzy? Jefferies explains the ‘reverse AI trade’
In his Greed & Fear note, Wood pointed out that India has lagged the MSCI Emerging Markets Index by 27 percentage points so far in 2025 — the steepest underperformance among major EMs — while the rupee has eased 3.4% to Rs 88.7 against the dollar.
The contrast, he said, stems from the dominance of AI-driven valuation surges in Taiwan, Korea and China, which together represent 61.8% of the EM index, compared with India’s 15.3% weight.“India has become the reverse AI trade,” Wood wrote, arguing that any correction in AI-heavy markets would likely favour India, “which is another way of saying it should outperform if the AI trade suddenly unwinds.”AI boom hits energy limitsWood warned that constraints on power availability are beginning to curb the pace of global AI expansion, despite colossal investment plans by US hyperscalers: $360–370 billion in capex expected in 2025 and around $470 billion in 2026.
He cited comments from Satya Nadella, Andy Jassy and Jensen Huang, with Huang cautioning that “China is going to win the AI race” because it has access to cheaper energy.Despite FII exits, domestic flows keep the market afloatIndia may be the worst EM performer on a relative basis, but it avoided a full-blown selloff because local investors have continued to buy aggressively:
- Equity MFs saw $3.6 billion in net inflows in October.
- Total domestic inflows touched $42 billion between January and October.
- Average inflows were $7.4 billion per month in 2025, comfortably offsetting new equity issuance of $5.7 billion a month.
Foreign investors, meanwhile, have withdrawn $16.2 billion this year — near record levels — yet markets avoided the kind of heavy correction typically associated with such outflows.Jefferies: rupee may have already bottomedWood and Mahesh Nandurkar, Jefferies’ India research head, said several macro indicators suggest the rupee has likely stabilised near the 89 mark.
They expect monetary easing, credit growth and the GST rate reductions effective September 22 to lift activity and nominal GDP in coming quarters.IT faces pressure, GCCs gain relevanceThe AI shift has hit Indian IT services the hardest:
- FY25 revenue growth slowed to 4%
- Q2 FY26 growth (ended Sept 30) was only 1.6% YoY
- Sector valuations compressed, with the BSE IT Index trading at 23x forward P/E vs 31x last December
Wood noted that while IT services have cooled, India-based global capability centres (GCCs) are becoming more central to India’s services export engine.
GCC-related exports within the $388 billion services basket gained prominence last fiscal year.Property stocks look attractiveIndian real estate developers were flagged as “positively attractive” by Wood, as many are trading below long-term valuation benchmarks.
Pre-sales for seven listed players are projected to rise 22% in FY26, while net debt across these companies has dropped sharply from Rs 520 billion in FY19 to a projected Rs 28 billion by FY26-end.Wood flagged state-level populism — especially in election-bound Bihar — as a major risk for the rupee and bond markets.
Bihar’s parties promised cash transfers of Rs 10,000–30,000 to women under the Mukhyamantri Mahila Rojgar Yojana.Even with the Centre’s deficit expected at 4.4% of GDP, the combined Centre–state gap remains elevated at 7.5%.
Bihar, with a per-capita GDP of Rs 69,321 and a population of 131 million, was cited as a stress test for fiscal discipline.Despite the year’s drawdown, Wood argued India’s structural story remains compelling — and could become more attractive if the AI rally in North Asia cools.(Disclaimer: Recommendations and views on the stock market, other asset classes or personal finance management tips given by experts are their own.
These opinions do not represent the views of The Times of India)
