India is re-emerging as a portfolio diversifier just as global investors crowd back into artificial intelligence-linked markets, creating an early test of whether the year's dominant equity trade can continue delivering returns.
Inflows into the AI ecosystem strengthened for a second week after a recent correction, according to a report by Elara Capital. Global emerging market funds attracted $4 billion, the most in six months, as the EM index rebounded from its 200-day moving average.
South Korea drew another $3.5 billion of foreign inflows, while Taiwan received $1.8 billion, its strongest intake in 23 weeks. Global industrial funds, another route into the broader AI ecosystem, recorded $1.3 billion of inflows, the highest in seven weeks.
Yet the renewed buying is occurring after the AI trade became increasingly crowded and returns began to moderate, Elara said.
An important aspect to monitor is the timing of these allocations, the report said. The correction has yet to trigger redemptions, leaving the durability of positions accumulated during the recent period of investor enthusiasm as the next major risk.
That concentration is beginning to strengthen the case for India, where persistent fund outflows are slowing and relative performance is improving.
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India-focused long-only funds have faced redemptions since July 2025, with much of the pressure this year reflecting capital being redirected towards AI-heavy markets such as Taiwan and South Korea, according to Elara. While the funds are still losing money, the pace of withdrawals has moderated in recent weeks.
Since mid-June, India-focused long-only funds have outperformed their emerging-market peers by about 10%, their strongest stretch of relative performance since February to April 2025, Elara said.
The shift aligns with HSBC's view that India can serve as an anti-AI diversifier as sharp swings in technology-exposed markets encourage foreign investors to broaden their portfolios.
HSBC strategists Prerna Garg, Herald van der Linde and Yogesh Aggarwal said in a report that AI-rotation outflows from India have largely played out. More than 80% of active global emerging-market funds remain underweight on the country, according to the bank.
A move by those funds back to a neutral position could generate about $25 billion of inflows, HSBC estimated. Foreign investors had already purchased $3.6 billion of Indian equities since mid-June, when the market began outperforming the broader region.
Indian equities rose about 6% over that period, HSBC said. South Korea's market, by comparison, has been roughly four times more volatile than India's this year, reinforcing India's relative appeal as global investors reassess exposure to the AI rally.
The flow picture remains uneven. Elara's data show that dedicated India long-only vehicles continue to face redemptions, while HSBC points to improving foreign portfolio investment and the potential for large underweight positions to be reduced. Together, the reports suggest that the immediate selling pressure is easing even though a broad foreign return to India has yet to fully materialise.
Domestic flows could provide an additional buffer. HSBC said systematic investment-plan contributions have remained strong and net equity inflows into Indian mutual funds recovered in June, with a large share directed towards small-cap and mid-cap funds.
The bank also pointed to improving fundamentals. About 73% of companies that had reported first-quarter results for the year ending March 2027 were either in line with or ahead of expectations. Consensus earnings estimates were upgraded for commodities, financials, industrials and consumer staples.
System credit growth accelerated to 18.3% in June from about 10% in late 2025, while automobile demand proved more resilient than expected, HSBC said. The bank recently raised India to neutral within its Asian equity strategy.
Valuations remain the key constraint. India continues to trade at the most demanding multiples in the region, though its valuation premium to emerging markets has normalised and the market is near the lower end of its historical range, according to HSBC.
The bank favours high-quality growth companies in domestically driven sectors including financials, automobiles, retail and hospitals. Private banks and real estate have become relatively more attractive after prolonged underperformance, while HSBC prefers consumer-discretionary companies over staples.
India's earnings trajectory is also less powerful than those of the major AI-linked markets. Consensus forecasts imply earnings-per-share growth of about 14% for India in 2026 and 17% in 2027, compared with 25% and 35%, respectively, for South Korea and Taiwan, HSBC said.
That leaves investors weighing India's relative stability and improving flows against faster earnings growth elsewhere. The near-term outcome may depend less on whether enthusiasm for AI disappears than on whether crowded positions can withstand weaker returns.
Other global flows also signal that investors continue to add risk. Yen-denominated investments into US funds rose to $1.3 billion, the strongest inflow since January, according to Elara. Gold funds attracted a cumulative $5 billion over five weeks after suffering $17 billion of redemptions since March.
For India, however, the inflection point is becoming clearer: the market no longer needs the AI trade to collapse. A slowdown in the pace of rotation may be enough to bring underweight global investors back.
