The global enthusiasm for artificial intelligence investments may be reaching a turning point, potentially triggering a substantial realignment of international equity portfolios. According to Christopher Wood's latest GREED & fear report from Jefferies, India is set to emerge as a significant winner as investors diversify away from what have become highly concentrated AI-related positions.
Why the AI Trade is Losing Momentum
Jefferies suggests that the peak of the AI capital expenditure cycle might be in sight, despite forecasts for considerable spending by major US technology companies in 2027. The report highlights a concerning trend among hyperscalers like Microsoft, Meta, Alphabet, and Amazon: deteriorating return expectations. Consensus forecasts for their median return on invested capital (ROIC) in 2027 have fallen from 21.7% at the start of 2026 to 16.8%.
Concurrently, capital intensity, measured as capital expenditure relative to sales, is projected to surge from 11.4% in 2023 to 44.2% in 2027. This growing disparity between accelerating investment and declining returns has raised questions about the long-term sustainability of the current AI spending spree.
India's Advantage in a Shifting Global Market
As investors reconsider their technology exposure, Jefferies identifies India as a clear emerging-market beneficiary of this reverse AI trade. India is increasingly viewed as a crucial alternative for portfolios seeking diversification away from technology-heavy markets.
“If these foreign long only investor groups were to neutralize their underweight in Indian equities, this could translate into potential net inflows of around $115 billion,” stated Rajiv Batra, head of Asia and co-head of global emerging markets equity strategy at JPMorgan. He further noted, “India has emerged as an ‘AI hedge’ for portfolios trimming or diversifying out of crowded AI trades.”
Supporting factors include falling oil prices, declining US Treasury yields, improving corporate earnings, and the unwinding of the AI trade. Foreign investors have already shown renewed interest, purchasing a net $7.2 billion of Indian equities over three weeks, including a record $5.2 billion in the latest week, following earlier net selling.
Attractive Valuations and Economic Fundamentals
Indian equity valuations appear relatively appealing, with the Nifty and Nifty Midcap 100 trading at 18.4 times and 23.1 times one-year forward earnings, respectively. Furthermore, machinery imports have more than doubled from $29 billion in FY21 to $62 billion in FY26, signaling a potential revival in private-sector capital expenditure. The Nifty 50 has also gained nearly 9% over the past month, outperforming several AI-heavy markets globally.
Despite the positive outlook, Jefferies cautions that renewed geopolitical tensions, particularly those involving Iran, and a potential rebound in crude oil prices remain significant risks to India's equity market trajectory.