In what appears to be a tailwind for the domestic equity market, the recent correction and heightened volatility in AI- and semiconductor-driven markets such as the US, Taiwan, South Korea and Japan are prompting global investors to reassess steep valuations and rotate capital towards relatively better-valued markets like India.
After being severely underperforming for the majority of the last 22 months, India’s equity benchmarks, BSE Sensex and NSE Nifty, outperformed tech-heavy global indices by gaining about 2 per cent in July.
After months of heavy selling, foreign institutional investors (FIIs) also turned net buyers in July with a cumulative purchase worth Rs 20199 crores, aided by moderating valuations, an improving corporate earnings outlook and stable currency.
Analysts believe the pullback in global technology stocks is more of a profit-booking phase than the end of the AI rally, but it has nevertheless reduced the intensity of FII selling in India, with investors increasingly favouring sectors such as financials, healthcare, industrials and IT services that offer stronger earnings visibility and a more attractive risk-reward profile.
Feroze Azeez, Joint CEO, Anand Rathi Wealth Limited, said that uncertainties in other Asian markets such as Taiwan and South Korea have prompted a reallocation of foreign capital towards relatively stronger emerging markets like India.
“The return of FII flows is a positive signal for market sentiment and liquidity, and can support equity markets in the near term. However, over the longer term, sustained market performance will continue to depend on corporate earnings and economic fundamentals rather than capital flows alone,” added Azeez.
“He stated that the recent decline in technology-focused global markets should not be seen as the end of the AI and semiconductor rally. After a strong run-up, the Nasdaq corrected around 10 per cent, Taiwan's index fell about 18 per cent during July, while Japan's Nikkei and South Korea's Kospi declined more than 15 per cent and 65 per cent respectively from their recent highs.”
“At this stage, the recent weakness does not indicate a structural shift in global markets, but rather reflects investors reassessing valuations after a sharp run-up. In fact, such phases often lead global investors to rotate towards relatively better valued opportunities, and India's IT services sector could be one of the beneficiaries,” Azeez said.
Sunny Agrawal, Head - Fundamental Research at SBI Securities, said that global investors are taking profits in AI- and semiconductor-heavy markets such as Taiwan, South Korea and parts of the US after an extraordinary rally, as concerns over rich valuations, earnings sustainability and the massive capex being undertaken by hyperscalers have prompted investors to diversify.
“After a ferocious rally, it is more likely to be a profit booking. Moreover, a steep correction is due to the entry of retail trades through leveraged ETFs, which are forced to rebalance the heavily concentrated portfolio almost on a daily basis due to sharp movement in stocks like Samsung. Going forward, the AI investment cycle and demand-supply will determine whether the exponential earnings growth is sustainable, and that will be the key determinant of further sustenance of the strong upmove witnessed during the last two years,” said Agrawal.
The two analysts remain constructive on Indian equities on the back of a strong earnings growth trajectory, expectations of sustained economic growth and moderating valuations.
“The near-term direction of the market will depend on a few key factors such as Crude oil prices, FPI flows and corporate earnings growth for the rest of FY27. While these factors could influence short-term market movements, India's long-term investment case continues to be supported by strong macroeconomic fundamentals and structural growth drivers such as digital transformation, rising domestic consumption and the ongoing capex cycle,” said Azeez.
Agrawal added, “We continue to remain constructive in Indian equities on the back of a likely two-digit earnings growth trajectory over the next 2 years coupled with comfortable valuations, reduction in selling intensity from FIIs since the last 4-5 months, strong domestic liquidity and resilient macros despite a challenging external environment.”
