Jefferies strategist Chris Wood has described India as the “reverse AI trade” this year after a period of significant underperformance against major emerging markets. In his latest Greed and Fear note, Wood observed that India has lagged the MSCI Emerging Markets Index by 27 percentage points year to date. The rupee has also weakened 3.4% against the dollar to 88.7.
The reason is India’s limited exposure to the AI-led rally that has driven markets in Taiwan, Korea, and China. These three markets account for over 60% of the MSCI EM Index, while India’s weight is about 15%. Wood notes that this positioning makes India a potential beneficiary if the AI trade cools in the coming months.
Despite heavy foreign institutional outflows of $16.2 billion this year, India’s market performance has held up due to strong domestic investor participation. Equity mutual funds saw net inflows of $42 billion in the first ten months of 2025. Monthly domestic inflows have averaged $7.4 billion, comfortably absorbing new equity supply.
Wood and Mahesh Nandurkar, Jefferies’ head of India research, point to improving macro indicators. They expect the rupee to find support near current levels as monetary easing, credit growth, and GST reductions work through the system. Nominal GDP growth is likely to strengthen in the coming quarters.
However, India’s IT services sector remains vulnerable to the global AI shift. Revenue growth slowed sharply in FY25 and in the September quarter of FY26. The sector’s valuation has corrected as a result, with the BSE IT Index now trading at 23 times forward earnings.
On the other hand, Wood highlights property developers as attractively valued. Pre-sales for major developers are expected to grow by 22% this fiscal year, and sector-wide net debt has dropped from 520 billion rupees in FY19 to an estimated 28 billion rupees by the end of FY26.
A key macro risk remains the rise in fiscal handouts at the state level. Bihar’s recent election included cash promises of 10,000 to 30,000 rupees for women under the Mukhyamantri Mahila Rojgar Yojana. While the central government deficit stands at 4.4% of GDP, the combined fiscal deficit of the Centre and states remains elevated at 7.5%.
From a long-term perspective, Wood reiterates that India remains well placed for investors looking beyond near-term underperformance. Its position as the reverse of the concentrated AI trade offers potential upside if valuations in North Asian technology markets correct.