Foreign investors groove to K-Pop music as India awaits its ‘reverse AI’ moment

Even as India awaits its 'reverse AI' moment, foreign investors keep grooving to K-pop music, more so after the recent three-day 19 per cent correction in South Korea’s stock benchmark Kospi. For now, there is little evidence of a slowdown in global demand for memory chips, with prevailing forecasts pointing to one of the largest supply shortages in history for both DRAM (Dynamic Random Access Memory) and NAND. UBS said the upcycle is likely to extend well into 2027. Indian investors are still hopeful. 

If timing the top tick in semiconductor stocks is perhaps the critical market-timing issue for global emerging market fund managers this year, it is also clearly critical for an Indian stock market hoping for renewed foreign inflows, Jefferies said.

To be sure, Korea's Kospi index has more than doubled (115.63 per cent) in the past one year against 7-9 per cent rise for Indian benchmarks Nifty and Sensex.

K-pop: Korean stocks still popular  

For now, UBS has upgraded South Korean equities to 'attractive', saying the recent volatility reflected technical unwinds rather than a deterioration in fundamentals. It said while South Korea’s technology sector led the recent drop, with SK Hynix and Samsung among the hardest hit, the selloff reflected broad de-risking and technical unwinds rather than any deterioration in underlying fundamentals.

"This is strongly supported by the latest export data: In February, South Korea's semiconductor exports surged by 22.5 per cent month on month and an extraordinary 262 per cent year on year, underscoring the resilience and global competitiveness of South Korean chipmakers," it said.

UBS said DRAM prices could see another robust increase, potentially exceeding 40 per cent quarter on quarter in the June quarter. UBS last month said India was rated underweight in its emerging markets universe, with the country commanding higher valuations for earnings growth that was not very different from the rest of EM. 

The lack of AI plays in India is keeping foreign investors away. Data showed that after selling Rs 22,615 crore worth equities in February, foreign investors have started March with Rs 17,570 crore of outflows, taking year-to-date outflows to Rs 30,917 crore.

What is reverse AI theme?

Given that large US technology giants have spent a lot on artificial intelligence, with this year's capex guidance in the north of $600 billion, there is a view that sooner than later investors would start asking for actual earnings. It may challenge tech firms' willingness to finance capex, and could even lead to selloff in AI favourites. Such a fall, if it comes, is expected to hit stocks of pure-play AI firms to powerful AI chip makers, from US to Taiwan and to South Korea, leading to investors flocking to markets like India with no AI frenzy.  

What global investors say

Jefferies said it spent several days in India’s financial centre this past week talking to investors and corporates. One frequently asked question, it said, is when foreign investors will return as net buyers of Indian equities since they have sold a net $32.7 billion since October 2024, despite buying a net $1.7 billion in February.

"The most likely trigger for a rotation back into India is a sudden conviction that the semiconductor cycle has peaked which for now remains lacking. Still the more the returns on the AI capex are questioned, and the more there is a question mark over the continuing willingness to finance that capex, the more it will become a real possibility that 2026 will mark the peak year for AI capex," Jefferies said in its GREED & fear note.

A key takeaway from Kotak Institutional Equities' recent investor conference was that most global investors are underweight India, even as they felt India is now more reasonably valued and there is some upside over a 12-month view.

"There were mixed views on whether to increase India allocations now or wait for another 1-2 quarters and stay with markets that are seeing good momentum like Korea, Taiwan, Japan, China etc. The consensus view was that the big shift in foreign sentiment towards India will come only when the AI bubble deflates, which may take some more time," it said.

Jefferies noted that the four major hyperscalers have guided investors for an enormous $620 billion in capex this year.

"That is one reason why GREED & fear is now Underweight both Taiwan and Korea in the Asia Pacific exJapan relative-return portfolio, as discussed in the latest GREED & fear flash, though that is clearly not how most investors are positioned," Jefferies said.

GREED & fear still has 6 per cent and 5 per cent, respectively, in Samsung Electronics and TSMC in the Asia ex-Japan long-only portfolio, and 5 per cent each in the global long-only equity portfolio.

Geopolitics:  Korea & India 

In the case of recent geopolitical tensions, Nomura said Thailand, India, Korea and the Philippines are the most vulnerable to higher oil prices due to their high import dependence, while Malaysia would be a relative beneficiary since it is an energy exporter.

There may be some short-term profit taking from equities in Korea and Taiwan, where momentum is strong and positioning appears stretched, if tensions meaningfully escalate from here, but we do not expect lasting damage, Nomura said.

Jefferies said there is a positive story in Indian equities, even if it is not positive enough as yet to trigger a wave of foreign buying in the absence of an unwind in hardware tech stocks.