India could outperform as AI trade cools, but structural challenges remain, say fund managers

Fund managers Rahul Chadha, Founder and Chief Investment Officer at Shikhara Investment, and Prashant Paroda, Portfolio Manager-Emerging Markets at Allspring Global Investments, suggest India may benefit from a cooling AI trade. After heavy capital flows into AI-driven markets like Taiwan, Korea, and parts of China over the past year, investors are reassessing whether these investments will deliver sustainable returns. This shift could redirect capital toward India, where mid-cap manufacturing and healthcare companies are showing strength. The AI trade’s momentum has depended on upcoming IPOs and fundraising activities, particularly in the U.S., which will determine whether valuations hold. As AI-related stocks face closer scrutiny, other sectors—including those in China and ASEAN—have seen declines of 30-40% year-to-date, creating opportunities elsewhere. India’s economy, supported by stable oil prices below $95 and strong foreign exchange reserves, is positioned to attract investor attention. However, long-term challenges remain. India’s demographic dividend could become a liability if job creation fails to keep pace, raising questions about competitiveness. Chinese companies, for instance, have achieved global scale with lower valuations and improving returns on capital. While India’s companies grew steadily in the high teens without an AI boost, investors are now questioning whether AI-driven growth in markets like Taiwan—where revenue surged from 10% to 50-60%—is sustainable. The shift in focus will test AI companies’ ability to demonstrate revenue growth and margin expansion once capital expenditure phases conclude. As private AI firms go public, investors will scrutinize their fundamentals, potentially creating openings in non-AI segments. India’s high-growth companies, which have avoided AI-driven volatility, could see renewed interest if the AI trade cools further. Paroda and Chadha compare the current landscape to the 1990s, when conglomerates gave way to private banks and IT services firms. They expect India’s market composition to evolve over the next decade, with new businesses emerging. For now, India’s mid-cap and healthcare sectors are leading gains, offering a counterbalance to broader market fluctuations.