India Remains Attractive Amid Foreign Investor Sell-Off, Despite Market Volatility

India's Emerging Market Status Remains Strong Despite Global Shift

India, once considered the hottest emerging market trade, may be losing its appeal to global investors as they flock to Korea and Taiwan in pursuit of the artificial intelligence (AI) boom. However, in his latest GREED & fear report, "Metamorphosis," Jefferies strategist Christopher Wood argues that India remains a structurally attractive market due to strong domestic participation and resilient midcap performance.

According to the report, India has managed to avoid becoming irrelevant to global investors despite massive foreign outflows and benchmark weight reductions in emerging market indices. Domestic mutual fund inflows, Systematic Investment Plan (SIP) contributions, and pension money are increasingly acting as a cushion for Indian equities, even as global funds shift towards semiconductor-heavy markets benefiting from the AI boom.

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The report highlights that the global AI boom has dramatically reshaped emerging market allocations, with investors aggressively buying semiconductor-linked markets such as Korea and Taiwan. India's weighting in the MSCI Emerging Markets Index has declined from 19.5% to 11.5% since the beginning of last year, while Korea's weighting increased from 9% to 20.6%, and Taiwan's share climbed from 19.7% to 25%.

Foreign investors have already sold a net $21.1 billion worth of Indian equities so far in 2026, surpassing last year's record outflow of $18.8 billion. The selling pressure is largely linked to the AI-driven semiconductor trade dominating global markets. Samsung and Hynix are forecast to earn profits totaling W452tn ($307 billion) this year, three times the total forecast profits of $102 billion for India's Nifty 50 universe.

The report also notes that AI-related capex is driving economic growth in both the US and Korea. In the United States, AI-linked investments contributed 43% to real GDP growth during the first quarter of 2026, while Korea's semiconductor exports and related investments accounted for nearly 55% of the country's quarterly GDP growth.

However, Jefferies believes that Indian midcap stocks continue to remain one of the most attractive segments within the domestic market. The Nifty MidCap 100 Index has rallied 19.2% from its April 2 low and recently touched a fresh record high. Since the beginning of 2023, the index has gained nearly 97%, significantly outperforming the Nifty 50's 34% rise during the same period.

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The report estimates that Nifty MidCap 100 earnings per share could grow 13% in the current fiscal year and 22% next year, reflecting stronger growth momentum than large-cap benchmarks. However, the brokerage acknowledges that valuations in the midcap segment have become expensive, with the Nifty MidCap 100 trading at 28.3 times 12-month forward earnings compared with 18.8 times for the Nifty 50.

Domestic flows are becoming increasingly important in supporting Indian equities amid continued foreign selling. According to the report, domestic equity mutual fund inflows surged to ₹500 billion in March, the highest level in eight months. Of this, ₹321 billion came through SIP contributions, reflecting continued retail participation in equities.

Overall, Jefferies believes that while India may temporarily remain overshadowed by the global AI and semiconductor rally, strong domestic inflows, rising SIP culture, and resilient midcap earnings continue to provide long-term structural support to Indian equities.