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India is seen as a growth allocation; Is it now also a diversifier to global equity risk
The India investing story is a simple story of consistent long-term real and nominal GDP growth, which is converted into revenues and profitability by firms, and which is reflected and rewarded by long-term returns in the stock market.
This is why we also term it ‘Predictable India’ – a close link between long-term GDP growth and stock market returns.
Chart 1:The ‘Predictable’ Link between GDP growth and stock market returns
Source: Bloomberg & MSCI, all data in USD, GDP and Index data is quarterly till March 2026. This is only for representation and understanding purpose and does not assure any promise or guarantee of same in the future. Past performance does not guarantee and is not indicative of future results
Indian GDP growth, company profitability and corporate return ratios over long cycles have tended to be higher than other markets/indices, and hence India also tends to trade at a valuation premium over other world markets.
Chart 2 and Chart 3:India commands a valuation premium due to higher growth potential
Source: Chart 2 – Morgan Stanley Research, India Strategy Playbook, August 2026;
Source: Chart 3 – Jefferies Research, August 2026
ACWI – All Country World Index; EPS – Earnings Per Share; PE – Price to Earnings This is only for representation and understanding purpose and does not assure any promise or guarantee of same in the future. Past performance does not guarantee and is not indicative of future results
However, as visible in all charts, India’s recent market performance has been underwhelming. Indian markets absolute and relative earnings growth has been lower/weaker than historical averages and thus has seen a price and valuation correction.
Table 1:India’s record underperformance – Has it reversed?
| (Gross Total Returns in USD) | 1 Month | YTD | Sept 2024 to July 2026 |
|---|---|---|---|
| MSCI India Index | 1.8% | -8.1% | -12.5% |
| MSCI Korea Index | -17.1% | 81.5% | 185.9% |
| MSCI Taiwan Index | -5.3% | 54.0% | 126.1% |
| MSCI Emerging Markets Index | -3.0% | 20.3% | 58.9% |
Source:Bloomberg, MSCI, as of July 31, 2026. Indian markets peaked in September 2024 and hence we have used that as a representative period to show cumulative performance since then. Past performance may or may not sustain in the future. Returns may increase or decrease as a result of currency fluctuations. Please refer to the Disclosure Statement at the end of this document.
This was not unexpected. Our 2026 outlook was titled Simple Story, Getting Complicated – where we reviewed 2025 with how growth impulses were slowing; valuations had remained stretched and market returns were to be modest. The extent of foreign investor selling and the dramatic underperformance though has also meant that India’s weightage in global indices has fallen sharply.
Chart 4:Are Foreign Investors ‘anti- India’?
(Source: NSDL FPI Monitor, Data till July 2026) Past performance may or may not sustain in the future. Returns may increase or decrease as a result of currency fluctuations. Please refer to the Disclosure Statement at the end of this document.
Chart 5:India’s has seen a dramatic fall in allocation in global/emerging market portfolio
(Source:Jefferies Research, Data as of July 2026) EM = Emerging market Index; Past performance may or may not sustain in the future. Returns may increase or decrease as a result of currency fluctuations. Please refer to the Disclosure Statement at the end of this document.
As seen in the charts above, Foreign investors have sold over USD 50 billion since September 2024. India’s weight in the MSCI emerging markets index is now down by almost half to ~11% from the peak of ~20%. Global emerging market managers also seem to be running an India under-weight in their portfolios.1
As we spoke in our webinar – India Investing: ‘TINA’ to ‘ANTI’, India investment sentiment has changed dramatically, especially post the advent of the AI investing thematic. With India markets lacking exposure to AI thematic in terms of clear plays on – AI foundational labs, memory companies, semi-conductor chip manufacturers, data centers etc., India has seen outflows from global investors and at the same time it has underperformed the likes of Taiwan, Korea, and broad emerging markets. 2 (see Table 1)
As the AI thematic seems to be facing a few hiccups, we have seen India’s relative performance improve over the past 2 months. If India underperformed for being ‘Not AI’; should India outperform when the world turns ‘Anti AI’.
The overall exposure to this AI thematic in an investment portfolio is likely to be reasonably high. Apart from tech and related stocks in public markets, global institutional investors will also have increased exposure through their private equity investments, holders of bonds issued by hyper scalers, data center’s and the ecosystem in their infrastructure and real estate allocations. Also, these assets would also show increased correlations. We believe there is substantial risk sitting in global portfolios exposed to this AI thematic. This risk will need to be diversified.3
Chart 6:AI concentration risk in global equity allocations is rising. India is diversified
(Source: HSBC Investment Research, CIO Academy)
| Sector | MSCI AC World July 2026 |
MSCI India July 2026 |
|---|---|---|
| Information Technology | 30% | 7% |
| Financials | 17% | 31% |
| Industrials | 11% | 11% |
| Consumer Discretionary | 9% | 13% |
| Healthcare | 8% | 6% |
| Communication Services | 8% | 5% |
| Consumer Staples | 5% | 5% |
| Materials | 4% | 9% |
| Energy | 4% | 8% |
| Utilities | 2% | 4% |
| Real Estate | 2% | 1% |
(Source: MSCI, Quantum Advisors)
India as Risk Diversifier
This is unusual given the usual logic of allocating to India given the long-term consistent growth in the economy and its reflection in stock market returns.
However, given the trend of thematic AI allocation which has no doubt done well and the fact that India does not have any relevant play and has thus underperformed, has led to a dramatic reduction in India’s allocation in global portfolios. We have argued in the past on the Great India Under-allocation.
The recent trend has exacerbated India’s under allocation. We will make the case that global AI thematic exposure is a lot higher given the exposure across asset class and the cross correlation. An increased allocation to India at this juncture should ideally be considered as a hedge against the global AI trade.
Chart 7:India Investing across Global Mood Swings
(Source: Refinitiv, MSCI, in USD, rebased to 100 in July 2000, EM = Emerging Markets, Data till July 2026) Past performance may or may not sustain in the future. Returns may increase or decrease as a result of currency fluctuations. Please refer to the Disclosure Statement at the end of this document.
Sources and Footnotes:
1 Jefferies Research – India Strategy
2 India is NOT AI – HSBC Global Research
3 AI exposure risk and total portfolio – MSCI
Important Disclosures & Disclaimers
Quantum Advisors Private Limited (QAPL) is registered in India and holds a Portfolio Management License from Securities and Exchange Board of India (SEBI), India vide registration number INP000000187. It is also registered with the Securities Exchange Commission, USA as an Investment Adviser and a Restricted Portfolio Manager with the Canadian Provinces of British Columbia (BCSC), Ontario (OSC), and Quebec (AMF). It is not registered with any other regulator. (Note- Registration with the above regulators does not imply any level of skill or training).
Investments in markets is subject to Market Risk. There is no guarantee or assurance that the historical results are indicative of future results.
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