Jefferies Links Record Foreign Equity Outflows to AI Trade

Jefferies Group characterized India's stock market as the inverse AI trade after foreign investors withdrew a record 29 billion USD from Indian equities in the first half of 2026. This followed 18.8 billion USD in outflows throughout 2025. The brokerage notes this selling was not driven by Indian domestic factors or economic weakness, but by a global portfolio reallocation toward tech hardware stocks in South Korea and Taiwan.

This shift coincided with South Korea's weighting in the MSCI Emerging Market Index increasing from 9% to 23.7%. Other headwinds included India's reliance on imported energy following a US-Israel attack on Iran. Despite these outflows, the Indian market remained resilient due to strong domestic participation, including mutual fund inflows and monthly SIP contributions totaling 318 billion rupees in June.

Recent data shows a trend reversal, with foreign investors returning as net buyers in July, investing 1.8 billion USD. Indian shares rallied on July 17 as the Asian AI chip rally cooled due to overcapacity concerns. Additionally, an upcoming MSCI index rebalancing is expected to attract 2.3 billion USD in passive investment flows. Looking ahead, Jefferies projects MSCI India companies will see earnings growth accelerate to 14% in FY27 and 17% in FY28.