India's 30-Year Low: Why Foreign Investors Are Exiting in 2026

A Historic Underperformance

India's equity markets are experiencing their most significant period of underperformance against other emerging markets (EMs) in three decades. In 2025, India lagged the broader EM universe by approximately 45%, a gap that has forced global investors to reconsider their portfolio allocations. This shift, however, is not seen as a negative verdict on India's economic fundamentals. Instead, it reflects a powerful earnings cycle taking hold in other parts of the world, driven primarily by the artificial intelligence (AI) boom. Market analysts suggest that this trend is based on relative value and earnings momentum, leaving the door open for capital to return once India's growth story regains its lead.

The Great Rotation to AI-Linked Markets

The primary driver behind the capital outflow from India is the compelling earnings growth seen in other EMs, particularly South Korea and Taiwan. These markets are at the epicenter of the global AI infrastructure build-out, leading to substantial earnings upgrades for companies involved in the entire supply chain. The investment theme is no longer confined to semiconductor manufacturers. It now extends to power generation, data centers, essential materials, and commodities, benefiting economies like Brazil and South Africa as well.

Kunal Desai, a Portfolio Manager at GIB Asset Management, notes that investors are comparing markets priced for perpetual low growth with those currently undergoing a significant earnings inflection. While India has long been regarded as a high-quality market, the rapid improvement in earnings visibility elsewhere has made other destinations more attractive from a tactical perspective. Global capital is flowing to where the growth is most visible and immediate.

Valuations and Earnings Tell the Story

The divergence between India and its EM peers is clear in the valuation metrics. The broader emerging markets are trading at approximately 12 times two-year forward earnings, with an expected earnings growth of around 21% and a return on equity (RoE) of 16%. In contrast, India trades at a much higher multiple of nearly 19 times two-year forward earnings, with a similar RoE but a lower projected earnings growth of about 15%. This valuation gap makes India appear expensive, especially when its earnings growth is not keeping pace.

Historically, India commanded a premium due to its superior earnings growth, typically enjoying a 500-basis-point advantage over other EMs. That situation has completely reversed. India now faces a 600-basis-point relative disadvantage in earnings growth. This flip highlights that the issue is not a deterioration in India's prospects but a rapid acceleration in the prospects of its competitors.

The AI Trade and Its Cyclical Risks

The current EM rally is heavily dependent on the AI infrastructure trade. The demand for advanced memory chips, driven by large language models and hyperscale data centers, has transformed the semiconductor industry. Korean chipmakers, for instance, have seen their bargaining power increase significantly, with full order books extending to 2028. This has led to strong volume growth and expanding margins.

However, the key question for 2026 is whether this demand is sustainable or cyclical. If AI spending continues at its current pace, the high valuations in markets like South Korea and Taiwan may be justified. But if the demand proves to be cyclical, these markets could be vulnerable to a correction. It is in this context that India becomes an interesting alternative. Desai describes India as a