Why an AI Stock Sell-Off May Not Boost Indian Equities

A potential sell-off in global Artificial Intelligence (AI) stocks may not automatically redirect foreign investment towards Indian equities, according to brokerage Bernstein. The firm has challenged the assumption that capital leaving AI-focused investments would naturally flow into markets such as India.

In a November 2 research note, Bernstein said the money committed to AI investments cannot simply be treated as capital waiting to be redeployed elsewhere. It highlighted India’s relatively high stock valuations, modest earnings growth expectations and crude oil-related pressures as factors that could limit foreign investor interest.

“India’s next chapter cannot be written around someone else’s disappointment. It has to be earned through its own delivery,” the brokerage said.

Why an AI Stock Sell-Off May Not Benefit Indian Equities

Bernstein noted that nearly $350 billion in private AI investments and around $600 billion in corporate AI spending should not be viewed as a pool of readily available funds.

A significant portion of this money is committed to venture investments, spending by major technology companies and project financing. A decline in AI stock valuations would primarily reduce investors’ paper wealth rather than release an equivalent amount of cash for investment in other markets.

The brokerage explained that companies cutting AI-related expenditure could use the savings to improve cash flows, repurchase shares or repay debt. Similarly, investors who unwind leveraged positions may need to use the proceeds to meet financing obligations.

For India to benefit from a shift away from AI stocks, investors would have to exit those positions, retain the proceeds for reinvestment and then choose Indian equities over other markets. Bernstein said there was little reason to assume that this sequence would automatically occur.

Foreign Investment Outflows Do Not Guarantee a Shift Towards India

Recent foreign investment flows also offer limited evidence of a major rotation towards Indian equities, according to Bernstein.

The brokerage said Foreign Investors had sold more than $150 billion to $200 billion worth of equities in South Korea and Taiwan. India, meanwhile, recorded around $31 billion in foreign investment outflows during the year.

Bernstein also cautioned against interpreting an increase in India’s weight in global investment portfolios as proof of fresh foreign investment.

For example, consider a hypothetical $100 billion fund with a 10% allocation to Indian equities. Its holdings in India would amount to $10 billion. If the fund’s total assets fell to $80 billion, India’s allocation could rise to 12% even if its Indian equity holdings declined to $9.6 billion.

This means India’s percentage allocation could increase without any additional money entering the market. The brokerage said investors should distinguish between changes in portfolio weight and actual capital inflows.

High Valuations Remain a Major Challenge for India

Bernstein identified India’s relatively expensive Stock Market valuations and earnings growth outlook as key challenges in attracting foreign capital.

According to the brokerage, Indian equities were trading at 18.6 times blended 12-month forward earnings, making India the most expensive market in its comparison. Its estimated earnings growth for calendar years 2025-27 stood at 11%, placing it near the lower end of the markets assessed.

Although valuations among large-cap stocks have moderated, Bernstein warned that earnings estimates remain vulnerable to downgrades and stagnation. Mid- and small-cap stocks, meanwhile, continue to trade at elevated valuations.

For foreign investors comparing opportunities across markets, the combination of relatively high valuations and moderate earnings expectations could make India less attractive, particularly if other markets offer stronger growth prospects at more favourable prices.

Bernstein Does Not Expect the Global AI Investment Cycle to End Soon

The brokerage also questioned the assumption that the global AI investment cycle is approaching its end.

Bernstein said earnings at companies benefiting from AI-related spending remain strong, while the adoption of the technology is still at an early stage. It expects earnings revisions for AI-linked companies to strengthen in 2027 and considers them better positioned than the Nifty on that measure.

This assessment suggests that a major reversal in global AI investment is not necessarily imminent. Even if some AI stocks face valuation pressure, the underlying spending and earnings trends could continue to support companies associated with the technology.

Crude Oil Prices Add to India’s Investment Challenges

Rising pressure from crude oil imports is another factor Bernstein highlighted while assessing India’s appeal to foreign investors.

The brokerage said the discount on Russian crude oil had largely disappeared, while supply-chain constraints had made sourcing more difficult. It also noted that India’s crude purchase price had moved above Brent, adding pressure to the country’s external balance.

Higher crude costs can affect India’s import bill and economic outlook, potentially influencing foreign investor sentiment towards domestic equities.

What Could Support Indian Stocks in the Coming Months?

Despite its concerns, Bernstein sees scope for modest gains in Indian equities through the remainder of the year. It identified mean reversion and the possibility of lower crude oil prices, particularly if tensions in the Middle East ease, as potential sources of support.

The outcome of the US midterm elections and a possible reduction in long-term capital gains tax could also influence market sentiment, according to the brokerage.

However, Bernstein maintained that these factors would not replace the need for stronger domestic fundamentals. India’s ability to attract foreign investment will depend on its earnings growth, stock valuations and broader economic performance rather than simply benefiting from a reversal in global AI investments.

“India’s next chapter cannot be written around someone else’s disappointment. It has to be earned through its own delivery,” Bernstein said.