Global investors, who aggressively rotated capital from Indian equities into AI-led trades in Taiwan and South Korea since May 2025, are now showing the first signs of 'exhaustion' in this positioning. Recent flow trends indicate a significant slowdown in global equity inflows, prompting analysts to ponder the implications for India's stock markets.
AI Trade Flows Decelerate in North Asia
Last week, global equity inflows slowed sharply to $2.6 billion, a stark contrast to the average of $22 billion seen over the preceding five weeks. This deceleration was primarily driven by softer inflows into the US. At a country level, South Korea experienced a historic foreign outflow of $1.3 billion, according to Elara Securities, while Taiwan's inflows sharply decreased to $160 million from a six-month weekly average of $820 million. Elara Securities described these trends as the initial indicators of fatigue in the AI-led investment strategy.
Moderating Outflows for India
Conversely, India-focused funds continued to record redemptions for the eleventh consecutive week, though the pace has notably moderated. Average weekly outflows have slowed to $230 million over the past month, down from $1 billion during March and April. Data reveals that India’s weighting in the MSCI Emerging Markets Index has fallen from 19.5 percent to 11.5 percent since the beginning of last year. In the same period, Korea and Taiwan saw their weightings increase significantly, rising from 9 percent to 20.6 percent and 19.7 percent to 25 percent, respectively.
Expert Outlook on Foreign Flows
Goldman Sachs suggests that the bulk of foreign selling in India is likely over, following record outflows in recent months. The firm estimates that the downside risk of incremental foreign selling is now limited to approximately $4-5 billion, after an estimated $22 billion in outflows year-to-date. However, Jefferies highlighted a significant disparity in profit forecasts, noting that Samsung and Hynix in South Korea are projected to earn a combined $307 billion this year, which is three times the total forecast profits of $102 billion for India’s Nifty 50 universe.
Valuation Concerns and Ownership Trends
Goldman Sachs also pointed out that India currently offers a less attractive risk-reward profile compared to North Asian markets, trading at significantly higher growth-adjusted valuations. This, combined with ongoing investor concerns about the potential adverse impact of AI on certain sectors, continues to influence foreign capital flows. The firm believes that earnings revisions in India are becoming an increasingly crucial factor for foreign investors.
Foreign ownership in Indian stocks reached a 14-year low in the March quarter, slipping below domestic institutional ownership for the first time in over two decades. Citi, on May 10, noted that MSCI India has underperformed the broader Emerging Markets index by 58 percent over the past year, attributed to the AI trade and rising crude oil prices. Despite this, Citi’s India sentiment indicator has returned to neutral, suggesting that historically, at these levels, the Nifty has delivered average high-single digit returns over the subsequent 12 months.