AI trade losing momentum? Jefferies says India could emerge as a big winner of global market rotation

The global artificial intelligence investment boom may be approaching a turning point, potentially triggering a major shift in international equity allocations. According to Christopher Wood's latest GREED & fear report from Jefferies, India could emerge as one of the biggest beneficiaries as investors diversify away from crowded AI-related trades.

The November 12 report suggests that concerns over excessive AI capital expenditure and declining investment returns are encouraging portfolio managers to explore opportunities outside technology-heavy markets.

Why is the AI trade losing momentum?

Jefferies believes the AI capital expenditure cycle may have peaked, despite expectations of substantial spending by major US technology companies in 2027.

The report highlights deteriorating return expectations among hyperscalers, including Microsoft, Meta, Alphabet and Amazon.

Consensus forecasts for their median return on invested capital (ROIC) in 2027 have declined from 21.7% at the beginning of 2026 to 16.8%. Meanwhile, capital intensity, measured as capital expenditure relative to sales, is projected to rise from 11.4% in 2023 to 44.2% in 2027.

This divergence between accelerating investment and declining returns has raised questions about the sustainability of the AI spending boom.

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Why could India benefit?

Jefferies identifies India as an obvious emerging-market beneficiary of the reverse AI trade, particularly as global investors reassess their technology exposure.

India is increasingly being viewed as an alternative for portfolios seeking diversification away from AI-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,” Rajiv Batra, head of Asia and co-head of global emerging markets equity strategy at JPMorgan, told CNBC.

“India has emerged as an ‘AI hedge’ for portfolios trimming or diversifying out of crowded AI trades,” Batra said.

He highlighted falling oil prices, declining US Treasury yields, improving corporate earnings and the unwinding of the AI trade as supportive factors.

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Are foreign investors returning?

Jefferies noted that foreign investors purchased a net $7.2 billion of Indian equities over three weeks, including a record $5.2 billion in the latest week, following net selling of $32.4 billion earlier in 2026.

Indian valuations also appear relatively attractive. The Nifty and Nifty Midcap 100 are trading at 18.4 times and 23.1 times one-year forward earnings, respectively.

Meanwhile, machinery imports have more than doubled from $29 billion in FY21 to $62 billion in FY26, indicating 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, including the US, Japan, South Korea and Taiwan.

However, Jefferies cautions that renewed tensions involving Iran and a rebound in crude oil prices remain significant risks to India's equity market outlook.

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