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India Equities: 4 Catalysts for Potential Outperformance
We identify potential catalysts which could help reverse India’s relative underperformance
Slower GDP growth and earnings growth, a depreciating Indian currency due to capital outflows, and limited participation in the AI thematic seems to have combined over the past 2 years to deliver a record underperformance for Indian Equities and continued large outflows by foreign investors.
Chart 1: India’s record underperformance against EM
Source: Refinitiv DataStream, Data till August 2026; Chart depicts % Year-On-Year relative performance. MSCI Indices are price returns in Gross USD, EM = Emerging Markets
This is only for representation and understanding purpose and does not assure any promise or guarantee that the historical results is indicative of future results.
The relative underperformance of India was driven more by the strong performance of companies in the technology, semiconductors, memory storage sectors which are well represented in countries like Korea and Taiwan.
India’s underperformance was also driven by continued foreign portfolio outflows. The extent of recent outflows has meant that cumulative foreign portfolio inflows into equities is now negative over 8 years. We start this data series from 2018 as that was the year when capital gains tax on equities was re-introduced.
Chart 2: Foreign Investors are ‘Exit’ing India?
Source for Chart: NSDL FPI Monitor, SEBI, Calendar Year Data till August 2026
Since September 2024, which happened to be India’s stock market peak, FPIs have sold over USD 50bn which impacted not only the market performance but also contributed to the poor performance of the Indian currency in 2025/26. Despite the selling, FPIs still own ~USD 800 bn worth of Indian stocks. However, they remain under-allocated, and the extent of under-allocation has increased.
What will reverse this trend of under-performance, outflows and under-allocation? We wrote in our 2026 outlook (Complicated 2025, Simpler 2026?) that India needs to get back to its long-term simple story of consistent real and nominal GDP growth which has been reflected in market returns.
We identify 4 potential catalysts which could combine to make Indian equities attractive and bring it back into global investors allocation decisions.
Catalyst 1: India as a diversifier to global AI risks
AI as a thematic investment has been remarkably successful in investment portfolios. We wrote about it in August 2026 to show the dominance of AI in investment portfolios and market performance.
However, there seems to be rising concentration in equity indices driven by stocks linked to the AI thematic.
Also, the exposure to the AI thematic is not only in public markets. As the profile chart shows and as we learn from other reports, there is likely to be increased exposure to AI through ownership of bonds issued by hyperscalers, exposure in private markets, and through investments in datacentres and its ecosystem from the infrastructure and real estate portfolios. There is the risk of some of these allocations being correlated and thus increasing the risk profile.
Chart 3 and 4: AI concentration risk in global portfolio allocations is rising.
Source for Chart 3: HSBC Investment Research, CIO Academy; Chart represents the weight of the Top 10 stocks in the respective FTSE Russell index used. The report states that the increase in concentration in these indices is driven by technology companies. There is no assurance or indication that the above composition of the index will be sustained in future and the same may vary as per the market conditions, from time to time. Source for Chart 4: Sourced from Bloomberg article - AI boom is making diversifying investment tougher for wall street; September 20, 2026
India seems to have missed out on most of these AI related exposures and its performance as evidenced by the relative and absolute market returns over the last 18-24 months.
Table 1: India’s record underperformance – Has it reversed?
| (Gross Absolute Total Returns in USD) | 1 Month | YTD | Sept 2024 to July 2026 (Annualised Returns in Bracket) |
|---|---|---|---|
| MSCI India Index | 1.8% | -8.1% | -12.5% / (-7.0%) |
| MSCI Korea Index | -17.1% | 81.5% | 185.9% / (77.4%) |
| MSCI Taiwan Index | -5.3% | 54.0% | 126.1% / (56.1%) |
| MSCI Emerging Markets Index | -3.0% | 20.3% | 58.9% / (28.8%) |
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.
However, as global institutional investors start thinking about AI as a risk allocation, we believe they should look at Indian public equities as an ‘AI’ risk diversifier.
Catalyst 2: India’s under-allocation in global portfolios
India’s weight in global GDP stood at 3.3% as of 2025. India’s weight in global market capitalization declined from ~4% to below ~3.3%. India’s weight in MSCI All Country World Index (ACWI) fell to 1.4%. and India’s weight in global emerging market index fell by 40% from ~21% to ~11%
Chart 5 and 6: India is losing weight in global indices and GEM portfolios
Source: Jefferies Research, August 2026
Source: Morgan Stanley Research, August 2026
‘ACWI’ = All country world index. ‘GEM’ = global emerging market Right chart considers Global Emerging Market (GEM) Funds which use the MSCI EM as its benchmark. It calculates these funds India weight in their portfolio in relation to India’s weight in the index to calculate the under/overweight of India in their portfolio Past performance does not guarantee future return. The graph is only for representation and understanding purpose and does not assure any promise or guarantee that the historical results is indicative of future results. The graph is only for representation and understanding purpose and does not assure any promise or guarantee that the historical results is indicative of future results.
Not only has India lost weight in global indices, but India is also ‘under-weight’ in global emerging market (EM) portfolios. India has historically traded at a premium to global and emerging market valuations and has remained an over-weight in portfolios. This bring us to our next potential catalyst for India’s outperformance
Catalyst 3: India’s relative valuations are now attractive and should draw potential flows
The reason India trades at a premium is because historically Indian companies on an average have had a higher earnings growth and a better return on equity profile as compared to emerging market or world indices
That of course faded away in the past 2 years which explains India’s relative underperformance. However, if the impact of AI theme on global investment and earnings cycle reduces and if India gets back to its higher financial return profile, we believe the historical gap may get restored.
This could also mean that India then could trade at its long-term average valuations with respect to emerging markets or world indices.
Chart 7 and 8: India commands premium valuations on better financial return profile
Source: Bloomberg | ROE data as of June 2026; ROE – Return on Equity;
Chart 8 shows MSCI India as a ratio over MSCI emerging market index for PBV: price to book value ratio This is only for representation and understanding purpose and does not assure any promise or guarantee that the historical results is indicative of future results.
Given that India has lost weight in global indices, global portfolio managers are under-weight India in their portfolio and that India’s relative valuation is much more palatable now than before, we believe that a positive sentiment towards India can draw in significant inflows.
As you can see in chart 2 above, foreign inflows into India could increase materially in a short period of time. India received upwards of USD 40 billion between 2020 and 2021 and again between 2023 and 2024.
As of now external conditions remain stressed for India, especially with the West Asia conflict driving up prices of oil, gas and fertilizers. However, as we wrote in our outlook piece, we believe there could be a steady investment and consumption recovery in India.
Catalyst 4: India’s GDP, investment and earnings recovery
Corporate revenue and capex remains on a steady uptrend supported by improvement in income growth and facilitated by an increase in industrial credit growth. We would expect nominal GDP to trend in double digits while consensus estimates on corporate earnings remain in double digits for the current and coming financial year.
India large-cap equity valuation and positioning seems attractive
We believe that Indian large-cap companies are attractively valued, have good balance sheets and are well placed to participate in the economic recovery.
Chart 9: India large-cap trades at long-term average valuations
Source: Bloomberg | PER = Price to Earnings Ratio; BSE-30 Sensex Index
Past performance does not guarantee and is not indicative of future results
The table below also provides some historical context of past periods of flat to negative returns and the prospective returns 3 and 5 years ahead.
Table 2: Large Cap equities poised for a rebound
| Start Date | End Date | Window Return in INR Absolute Returns |
Next 3 Yrs in INR Absolute Returns |
Next 5 Yrs in INR Absolute Returns |
Avg US 10 Yr G-Sec Yield for Window Period |
|---|---|---|---|---|---|
| 29-06-2007 | 30-06-2009 | 1.4% | 27.5% | 88.2% | 3.7% |
| 30-09-2009 | 30-09-2011 | -0.6% | 67.2% | 85.1% | 3.2% |
| 30-11-2009 | 30-11-2011 | -1.9% | 84.4% | 81.0% | 3.0% |
| 30-04-2010 | 30-04-2012 | 1.7% | 61.9% | 88.7% | 2.7% |
| 31-05-2010 | 31-05-2012 | -0.9% | 77.5% | 107.5% | 2.6% |
| 30-06-2010 | 29-06-2012 | 1.7% | 64.2% | 91.5% | 2.6% |
| 30-07-2010 | 31-07-2012 | -0.2% | 69.1% | 104.8% | 2.5% |
| 31-08-2010 | 31-08-2012 | -0.2% | 56.9% | 100.4% | 2.5% |
| 31-12-2010 | 31-12-2012 | -1.4% | 39.3% | 89.4% | 2.3% |
| 31-03-2011 | 01-04-2013 | 0.2% | 42.6% | 100.5% | 2.1% |
| 01-12-2014 | 30-11-2016 | -1.5% | 52.5% | 119.7% | 2.0% |
| 31-12-2014 | 30-12-2016 | 1.2% | 54.7% | 125.6% | 2.0% |
| 30-01-2015 | 31-01-2017 | -0.4% | 45.4% | 115.6% | 2.0% |
| 29-06-2018 | 30-06-2020 | -1.5% | 93.2% | 163.1% | 2.1% |
| 31-07-2018 | 31-07-2020 | -0.2% | 84.8% | 137.5% | 2.0% |
| 31-08-2018 | 31-08-2020 | -0.2% | 75.3% | 127.9% | 1.9% |
| 31-08-2024 | 31-08-2026 | -2.4% | ? | ? | 4.3% |
Source: Bloomberg, calculated for Nifty-50 Index, all returns mentioned are in absolute terms and are not annualized. The above table is only for information and representation purpose only. Past performance is not a guarantee and is not indicative of future results.
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).
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