India's stock market has distinguished itself from global trends, emerging as what Jefferies describes as the 'inverse AI trade.' While international investors poured billions into AI-focused markets like South Korea and Taiwan, India experienced significant foreign outflows, not due to weakening fundamentals, but a global portfolio reallocation.
Understanding the 'Inverse AI Trade'
According to Jefferies' latest GREED & fear report, the global surge in artificial intelligence investment prompted a shift towards markets with strong technology hardware sectors. This led to substantial capital flows into countries like South Korea and Taiwan, which are direct beneficiaries of AI demand. Conversely, India, whose market is primarily driven by domestic consumption rather rather than AI-related technology, saw foreign investors pull back.
Foreign portfolio investors (FPIs) recorded net sales of US$29 billion in Indian equities during the first half of 2026, following US$18.8 billion in sales in 2025. This move, Jefferies asserts, had "nothing to do with India's underlying economy or corporate earnings," but was a consequence of global investors chasing AI-linked opportunities, particularly as South Korea's weight in the MSCI Emerging Markets Index significantly increased from 9% to 23.7%.
Domestic Resilience and Mid-Cap Strength
Despite the unprecedented foreign outflows, India's equity market demonstrated remarkable resilience, largely supported by its strong domestic investor base. A defining characteristic has been the exceptional performance of mid- and small-cap companies.
- The Nifty MidCap 100 Index surged 99% since the beginning of 2023, far outpacing the Nifty 50's 33% gain.
- Companies within the MidCap 150 universe delivered an impressive 18% compound annual earnings growth over the past two years, compared to 8% for large-cap companies in the Nifty 100.
Domestic mutual funds also saw healthy inflows, with systematic investment plans (SIPs) contributing ₹318 billion in June, accounting for 87% of total mutual fund inflows. This steady stream of domestic capital provided crucial liquidity and stability amidst foreign selling.
Jefferies' Outlook: A Potential Shift to Large Caps
Looking ahead, Jefferies suggests that while domestic flows have sustained India's market, leadership within equities could begin to shift. Large-cap stocks, having underperformed for an extended period, now appear more attractive. The Nifty 100 currently trades at a 33% discount to the Nifty MidCap 150 on one-year forward price-to-earnings multiples, significantly wider than the long-term average discount of around 20%.
If global enthusiasm for the AI trade cools and foreign portfolio flows normalize, India's undervalued large-cap segment could become a key beneficiary. Until then, the report concludes that India's stock market will continue to stand apart as the 'inverse AI trade,' primarily buoyed by its robust domestic investment.