India’s Market Underperformance Linked to Global AI Rally, Not Domestic Weakness

According to the report, markets such as South Korea, Taiwan and the United States have significantly outperformed due to their strong exposure to the global AI trade, particularly in AI hardware and semiconductor-linked businesses.

"Since CY24, India's headline underperformance has been largely driven by global AI trade, where markets like Korea, Taiwan, and the US have significantly outperformed," the report said.

The brokerage said India's lower participation in the AI-led rally was largely 'structural' in nature.

"The divergence is structural. India's lower exposure to AI hardware and the narrow, concentrated nature of the global AI rally have limited participation, thereby overstating overall market weakness," the report noted.

Motilal Oswal added that India's broader market performance appears relatively resilient once the impact of IT services is excluded.

"India's ex-IT performance gap is meaningfully narrower, indicating relatively resilient broader equities," the report stated.

The report showed that South Korea remained the best-performing market globally in calendar year 2026 so far, rising 53 per cent in USD terms, followed by Taiwan at 33 per cent and Brazil at 28 per cent. India's Nifty, however, declined 13 per cent in USD terms during the same period.

The brokerage further said any moderation or unwinding of the global AI trade could potentially redirect foreign investor flows toward domestic growth-oriented markets like India.

"With AI trade having run for an extended period, any potential unwinding or rotation could redirect FII flows toward structurally strong domestic growth markets like India," the report said.

Shifting focus to defence stocks, the report highlighted growing geopolitical tensions as a major driver for the sharp rally in global defence stocks.

"Rising geopolitical tensions and the resultant surge in defence spending and orders have driven a significant turnaround in global defence companies," it said.

According to the report, the aggregate market capitalisation of global defence companies expanded at a compounded annual growth rate (CAGR) of 19 per cent during CY21-CY26YTD to USD 3.5 trillion.

Motilal Oswal also cautioned that elevated crude oil prices and commodity strength could continue to pressure global markets and corporate profitability.

"Crude prices spiked in FY26 and remain elevated amid West Asia tensions and supply disruptions, raising concerns over growth, current account deficit (CAD), inflation, INR depreciation, and fiscal balances," the report stated.

On the domestic front, the report said domestic institutional investors (DIIs) continued to remain strong buyers despite sustained foreign institutional investor (FII) selling.

"DIIs invested USD5.4b, marking the 12th month of over USD5b in monthly inflows," the report noted, adding that FIIs remained net sellers with outflows of around USD21 billion on a CY26 year-to-date basis.

- ANI