Why India's stock market is the 'inverse AI trade', according to Jefferies; here's what it means

As artificial intelligence (AI) has become the dominant investment theme globally, India's stock market has stood out for moving in the opposite direction. Jefferies describes India as the "inverse AI trade", arguing that foreign investors pulled billions of dollars out of Indian equities not because of concerns over the country's fundamentals, but because they redirected capital into AI-driven markets such as South Korea and Taiwan.

In its latest GREED & fear report, the brokerage said India's recent foreign investor outflows were largely a consequence of global portfolio reallocation toward AI-related technology stocks rather than weakness in the Indian economy or corporate earnings.

What does 'inverse AI trade' mean?

According to Jefferies, the global AI boom prompted investors to increase exposure to markets with large technology hardware companies that were expected to benefit directly from rising AI demand. This led to significant allocations toward Korea and Taiwan, while India, whose market is driven more by domestic consumption than AI-related technology, witnessed heavy foreign selling.

Aspect	What Jefferies Says
Why India is the 'inverse AI trade'	Global investors shifted money into AI-linked markets like South Korea and Taiwan instead of India.
Main reason for FPI outflows	Portfolio rotation into AI hardware stocks, not deterioration in India's fundamentals.
Net FPI flows	Foreign investors sold a record US$29 billion of Indian equities in H1 2026 after selling US$18.8 billion in 2025.
July trend	FPIs turned net buyers again, purchasing US$1.8 billion of Indian equities in July (up to July 15).
MSCI EM shift	South Korea's weight in the MSCI Emerging Markets Index increased from 9% to 23.7%, attracting global capital.
Market resilience	Strong domestic investors and mutual fund inflows helped cushion the impact of foreign selling.
Best-performing segment	Nifty MidCap 100 has risen 99% since the start of 2023 versus 33% for the Nifty 50.
Earnings growth	MidCap 150 companies delivered 18% CAGR earnings growth over two years versus 8% for Nifty 100 companies.
Domestic support	Monthly SIP contributions reached ₹318 billion in June, accounting for 87% of mutual fund inflows.
Jefferies' outlook	Large-cap valuations have become attractive and could benefit if the global AI trade cools and foreign investors return.

The report noted that foreign investors sold a record net US$29 billion of Indian equities in the first half of 2026, after net sales of US$18.8 billion in 2025. However, it also highlighted that overseas investors have returned as net buyers in July, purchasing US$1.8 billion worth of Indian stocks—the first monthly inflow since February.

Jefferies said the selling was "nothing to do with India" and instead reflected the sharp increase in South Korea's weight in the MSCI Emerging Markets Index, which climbed from 9% to 23.7% over the period as investors chased AI-linked opportunities.

Why did India's market remain resilient?

Despite the record foreign outflows, India's equity market remained supported by domestic investors.

Jefferies said one of the defining features of the market has been the strong performance of mid- and small-cap companies. Since the start of 2023, the Nifty MidCap 100 Index has gained 99%, compared with a 33% rise in the Nifty 50, reflecting stronger earnings growth and continued domestic participation.

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The brokerage cited research showing that companies in the MidCap 150 universe delivered 18% compound annual earnings growth over the past two years, compared with 8% for large-cap companies in the Nifty 100. Domestic mutual fund inflows also remained healthy, with equity funds receiving ₹543 billion in April, ₹291 billion in May and ₹367 billion in June.

Another important pillar has been systematic investment plans (SIPs). Monthly SIP contributions stood at ₹318 billion in June, accounting for 87% of total mutual fund inflows, providing a steady source of liquidity even as foreign investors exited.

What does Jefferies expect next?

While Jefferies says India's market has benefited from resilient domestic flows, it believes the leadership within equities could begin to shift.

The report argues that large-cap stocks now appear more attractive after a prolonged period of underperformance. Although mid-caps are still expected to deliver faster earnings growth, the gap with large caps is forecast to narrow over the next two years. At the same time, the Nifty 100 trades at a 33% discount to the Nifty MidCap 150 on one-year forward price-to-earnings multiples, compared with the long-term average discount of around 20%.

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According to Jefferies, if enthusiasm for the global AI trade begins to fade and foreign portfolio flows normalise, India's undervalued large-cap segment could be among the key beneficiaries. Until then, the report suggests India's stock market will continue to stand apart as the "inverse AI trade" — a market supported primarily by domestic investors rather than the global AI investment frenzy.