Muted AI exposure and war spell trouble for Indian equities

Foreign investment in Indian equities hit its lowest level in nearly 10 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 feeling 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 past 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 labor most exposed to automation in the current AI cycle. This 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? Some 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: TADAWUL-

The TASI was up 0.1% yesterday on turnover of SAR 5.7 bn. The index is up 5.0% YTD.

In the green: Dar Albalad (+6.9%), Saudi Cable (+4.6%), and Arabian Pipes (+4.5%).

In the red: Saudi Industrial Development (-5.0%), Saleh Alrashed (-4.4%), and Rasan (-4.4%).

THE CLOSING BELL: NOMU-

The NomuC was flat yesterday on turnover of SAR 26 mn. The index is down 1.4% YTD.

In the green: Digital Research Company (+12.1%), Sahat Almajd (+9.9%), and Service Equipment (+6.6%).

In the red: Lana Medical (-14.2%), Fadeco (-9.7%), and Ratio (-9.3%).