Muted AI exposure and war spell trouble for Indian equities

Foreign investment in Indian equities hit its lowest level in nearly ten years, with Bloomberg reporting that overseas holdings dipped to INR 7.3 tn at the start of June. The slide marks a sharp reversal for a market that spent years as one of the standout destinations in emerging markets, drawing investors in with its strong GDP growth, expanding middle class, and young demographic dividend. Two converging forces are now driving the retreat.

The US-Iran conflict has rattled global investor sentiment, but India is absorbing the shock more acutely than most. As the world's third-largest oil importer, India is directly exposed to the elevated oil prices triggered by the conflict. Higher energy costs feed quickly into inflation, widen the current account deficit, and put downward pressure on the INR, which has already fallen from around INR 90 to beyond INR 95 against the USD.

The resulting risk-off sentiment has accelerated foreign outflows that were already underway: India recorded USD 17 bn in outflows by late 2025 as US tariff pressures and weaker global sentiment began to bite, with overseas ownership of NSE-listed firms falling to under 17% — around a 15-year low.

The second headwind is structural and longer-term, but investors are pricing it in now. India's economic model has long relied on a large, skilled, English-speaking workforce to power its services and outsourcing sectors — but that is precisely the category of labour most exposed to automation in the current AI cycle. That could threaten a core pillar of India’s GDP, and — unlike Taiwan or South Korea — India has a limited presence in the semiconductor and AI infrastructure supply chains that stand to benefit most from the current technology wave.

Despite the foreign exodus, there’s still been activity. The IPO market closed 2025 with a record USD 22 bn raised across more than 200 approved listings. The caveat: 75% of allocations were absorbed by domestic institutions and retail investors.

Who's picking up India's slack? The capital rotating out of India is, in part, finding a home in markets better positioned for the AI era. Taiwan and South Korea both have deep semiconductor and AI infrastructure exposure that India lacks. Taiwan has been climbing toward India's spot as the fifth-largest global equity market by capitalization — driven largely by TSMC, which climbed more than 25% in April alone. South Korea's Kospi has recently hit a record high.

MARKETS THIS MORNING-

Japan’s Nikkei hit record highs in early trading, echoing gains felt across Wall Street. The benchmark is up over 2% this morning with gains across automakers and tech stocks fueling the rally. The Shanghai Composite is looking at more modest gains, while the Hang Seng is in the red, down 1.2%.

THE CLOSING BELL-

The EGX30 rose 0.1% at yesterday’s close on turnover of EGP 10.4bn (28.5% above the 90-day average). International investors were the sole net sellers. The index is up 26.5% YTD.

In the green: Oriental Weavers (+3.2%), Kima (+3.2%), and Ibnsina Pharma (+1.8%).

In the red: Palm Hills Developments (-2.6%), Orascom Development (-2.3%), and Abu Qir Fertilizers (-2.1%).