For the last two years, the Indian stock market has been a growth ghost town, pacing back and forth to deliver a frustrating zero per cent return as Nifty heavyweight Dhurandhars look bloodied and written off by global investors. But you can't keep true champions down for long, and to borrow the legendary cinematic warning: “Ghayal hoon isiliye ghatak hoon!” It is precisely because these market powerhouses are wounded that they have now become incredibly dangerous for bears, and possibly ripe for an explosive rally.
As a violent tech-led meltdown triggers an unwinding of the global artificial intelligence trade in America’s Nasdaq, South Korea and Taiwan, analysts say India could emerge as the ultimate "anti-AI" trade, positioning Dalal Street to become a major relative beneficiary and an oasis of peace in a fracturing financial landscape.
The mechanism driving this transition is a sharp reversal of global capital flows. Foreign institutional investors (FIIs) have aggressively abandoned India, withdrawing approximately ₹2.7 lakh crore so far in 2026, following a massive ₹1.66 lakh crore selling spree in 2025. This relentless exodus was directly engineered by an explosive chip rally in Taiwan and South Korea, which pushed their market capitalizations above India's.
However, the structural cracks appearing in the global semiconductor trade signal that this leadership cycle has entered an overextended peaking phase, paving the way for foreign capital to find its way back to Dalal Street.
ICICI Prudential Mutual Fund CIO S. Naren, one of India's most closely watched fund managers, laid out the mechanics at the ET Alpha Wealth Summit last week. "What happened is that FIIs never used to invest heavily in Korea and Taiwan — they were seen as slow-growing markets, particularly Korea," he said. "They used to argue: why invest in Korea when India's corporate profits grow 10% a year? Then DRAM prices shot up. SK Hynix and Samsung suddenly showed massive profit growth — 200%, 300%, 400% — which India simply cannot deliver."
The consequences for India's market cap ranking were tangible. In recent weeks, South Korea and Taiwan's combined equity valuations surged past India's, leaving Dalal Street behind in the global pecking order.
"A foreign broker told us that in Korea, people are taking loans against insurance policies to buy SK Hynix and Samsung. In Taiwan, people are taking personal loans to buy semiconductor stocks. Normally, such behaviour means you are close to a bubble," Naren said.
The Rotation Signal: When the Tide Turns
Bubbles fuelled by retail leverage tend to end badly and fast. The June 5 crash in semiconductor stocks may be the first concrete evidence that the AI capital cycle, which punished India so relentlessly over two years, is starting to peak.
"The EM trade that began in May 2025 — centered around Taiwan, South Korea and Brazil — is showing its first meaningful signs of exhaustion," Elara Capital’s Sunil Jain said.
Dr. V.K. Vijayakumar, Chief Investment Strategist at Geojit Investments, framed the precise mechanism by which India stands to benefit. "If FPIs are to invest in India, the AI trade — which has been the principal driver of FPI outflows away from India — should change. There are early signs of this happening. If the AI trade cools down and reverses, that can trigger a reversal of FPI outflows. Therefore, watch out for this trend."
The structural argument runs deeper than mere rotation. Vikas Khemani, Founder of Carnelian Asset Management, argues that the concentration risk embedded in Taiwan and South Korea makes them fundamentally fragile bets. "Korea and Taiwan are essentially semiconductor and electronics derivative plays — Samsung, SK Hynix, TSMC drive disproportionate weights. Single product cycle, single end-market direction (AI capex), significant geopolitical risk versus China, and demographics among the oldest in Asia," he said.
Bajaj FinServ AMC notes that India is "a diversified domestic-economy-led market, supported by sectors such as financials, consumption and information technology, with strong exposure to local demand" — precisely the kind of broad-based growth story that a single chip cycle can neither replicate nor disrupt.
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India: Unloved, Underweight, and Undervalued
What makes the setup genuinely interesting for bulls is not just that the AI trade may be peaking but also how deeply India has been abandoned in the process.
Khemani points out that active global managers are currently running 2-3% below benchmark weight on India. "When global investors remain structurally underweight India and domestic investors are being urged to reduce India to chase recent winners abroad — that, historically, has been a moment to lean into India, not away from it," he said.
Valuations, battered by two years of outflows, have mean-reverted significantly. Dhiraj Relli, MD and CEO of HDFC Securities, notes that the Nifty is currently trading at close to a 10% discount to its long-period average, an unusual condition for a market that routinely commands premium multiples.
"Valuations are closer to long-term averages, particularly within large-cap stocks, while earnings growth is expected to accelerate in the second half of FY27," Relli said. "Hence any near-term volatility should be viewed as an opportunity to increase equity exposure. I continue to believe that the Nifty could hit a new all-time high later this year once uncertainty around the US-Iran conflict starts abating."
Naren himself acknowledged the timing is uncertain, even as he identified the opportunity. "India is not cheap, but the Korea and Taiwan cycle is clearly more stretched. Historically, when something becomes overvalued, it first corrects to fairly valued — so India may get a chance to do well in between, but there could be a tough period first."
Khemani's conclusion is the boldest of the lot. "This is not a moment to reduce their India exposure. It is a moment to recognize that India's structural re-rating is in front of us, not behind us," he said. "The right portfolio response is to hold India as the core — complemented, where genuinely needed, by global allocation that captures themes the domestic market cannot offer."
The thesis built on a simple inversion that the very forces that made India the world's worst-performing major market during the AI boom, namely its lack of semiconductor exposure, domestic demand orientation, and relatively lower volatility to global tech cycles, become its greatest attributes the moment that boom ends.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
