India – A Bridge to Global Change
India has spent much of 2026 outside the centre of the global equity story. Markets have been dominated by the rapid expansion of artificial intelligence investment, exceptionally strong semiconductor earnings and renewed pressure from higher oil prices and global interest rates. Those forces have created a more challenging backdrop for India. As foreign investors reduced exposure, the rupee weakened and India lagged both emerging market peers and many global asset classes.
Yet market performance has contrasted sharply with a domestic economy, which has continued to deliver. Growth continues to surprise positively, corporate earnings are recovering, macroeconomic balances have strengthened and policymakers have greater capacity to absorb external shocks than in previous cycles.
The resulting disconnect between market performance and domestic fundamentals is central to the opportunity we see today.
A challenging global backdrop
Three forces have shaped the market environment this year. The first is the energy shock. India remains a major oil importer, so higher crude prices affect the trade balance, inflation outlook and currency. The second is the rise in global interest rates and bond yields, which has put pressure on emerging market currencies and encouraged international investors to favour markets with either higher yields or more direct exposure to the prevailing growth themes. The third is the AI investment boom. Across Asia, earnings upgrades and equity returns have been unusually concentrated in semiconductor heavy markets. Korea and Taiwan have been among the clearest beneficiaries as global capital expenditure on compute, memory and AI infrastructure has accelerated. India, with a much smaller technology hardware weighting, has a larger share of financials, consumer businesses, healthcare and domestically oriented companies. AI related themes account for around 14.5 per cent of the Indian market, compared with more than 80 per cent in Taiwan and close to three quarters in Korea.
Rolling 12m trailing capex to end of quarter (US$ bn)
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Source: Macrobond, Bloomberg, HSBC Asset Management, August 2026
AI theme exposure by market (%)
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Source: Bloomberg, Jefferies, data as of September 2026
As a result, India has participated less in the extraordinary earnings acceleration generated by the AI capex cycle. Recent relative performance therefore reflects, in part, India’s different market composition rather than a deterioration in its domestic fundaments. The pressure is visible in eight consecutive weeks of relative underperformance — the longest in roughly 25 years — alongside a period of pronounced weakness relative to global asset classes. Foreign selling has also been substantial, even as domestic investors have continued to provide support.
At the same time, India’s different sector composition provides diversification from the earnings drivers that have dominated markets this year. Indian equities are less dependent on continued increases in global semiconductor investment than those of several regional peers. That distinction could become increasingly valuable as the global earnings cycle becomes more balanced. Consensus expectations point towards a less extreme dispersion in 2027 with technology related earnings remaining strong, but growth moderates from exceptional levels while India’s profit trajectory becomes comparatively firmer.
Domestic momentum is strengthening
Against that backdrop, India’s macro data has held up well. Real GDP grew 7.8 per cent year-on-year in 1QFY27, ahead of expectations despite the energy price shock. Inflation has remained relatively contained despite the energy shock, and high frequency indicators such as cement consumption and electricity demand remain firm. The corporate earnings cycle is also improving, with the broad NIFTY 500 universe profit growth rebounding from -5.2 per cent year-on-year in 2QFY26 to 11.4 per cent in 1QFY27.
Nifty 500 sales (ex-OMC) up 8%
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Nifty 500 EBITDA (ex-OMC) up 5%
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Nifty 500 PAT (ex-OMC) up 11%
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Source: Motilal Oswal Broking, Bloomberg, data as of September 2026
India also enters this period with stronger external buffers. Even with oil assumed at USD95/bbl, the current account deficit is estimated at around 1.6 per cent of GDP, remaining relatively contained compared with India’s own history. At the same time, foreign currency deposit inflows have strengthened the capital account and supported foreign exchange reserves, giving the Reserve Bank of India (RBI) greater capacity to manage periods of currency pressure and capital outflows.
Current account balance as % of GDP
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Capital account balance as % of GDP
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Stronger balance sheets provide India with an important source of resilience. The government has been reducing its fiscal deficit, while Indian corporates have spent much of the past decade deleveraging. That contrasts with several major developed economies, where fiscal positions have become more stretched. Together, these trends create greater capacity on both sides of the economy to absorb shocks while continuing to invest. During the recent energy shock, for example, the government had greater room to cushion households through changes in fuel taxation, rather than pass the full increase in energy costs directly to consumers.
India’s sensitivity to oil is also gradually changing. The economy is more services oriented, renewable energy is taking a larger share of incremental power generation, and electrification continues to reduce oil intensity. Oil consumption per unit of GDP has fallen from around 0.20 barrels per INR 10,000 of GDP in the late 1990s to around 0.116 today. Oil still matters, but its effect on domestic activity is less pronounced than in previous cycles.
New shock absorbers are emerging
One less conventional source of support comes from household wealth. Indian household gold holdings are estimated at around USD3.9 trillion, roughly double their value two years earlier. A growing gold loan market, with organised assets of around USD197 billion, also allows part of that wealth to be monetised, turning what has historically been a relatively passive store of value into an additional source of household liquidity.
While this does not replace wage growth or broader consumption fundamentals, it provides an additional buffer during periods of macroeconomic stress and adds to the resilience of household demand.
Value of gold held by Indian households
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Capital account balance as % of GDP
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Source: RBI, Jefferies, Bloomberg, data as of September 2026
Relative valuations are becoming more supportive
Resilient fundamentals are increasingly being accompanied by a more supportive valuation starting point. India has historically traded at a premium to emerging markets, reflecting superior long-term growth, stronger returns on capital and a large domestic investor base. Following the recent period of underperformance and international tailwinds, India’s price-to-book valuation has moved below its own 10-year average - notable for a market that has historically commanded a sizeable premium. That premium has narrowed as investors crowded into exceptional AI related earning growth driven by capex.
On relative price-to-book measures, India has de-rated significantly versus emerging markets to its lowest level in roughly two decades. Its long run relative performance has also moved into territory that historically preceded stronger subsequent returns. While neither measure is a precise timing signal, taken alongside improving earnings and a more supportive macro backdrop, they point to a more attractive relative starting point.
Regional Premium / (Discount) to 10-year average on Price to Book
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Source: MSCI, Refinitiv, HSBC Asset Management, 8 October 2026
Global FX valuation
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Source: Macrobond, Bloomberg, HSBC Asset Management, September 2026
The currency picture reinforces that assessment. After a period of depreciation, valuation models suggest the rupee has become increasingly inexpensive relative to its longer-term fundamentals. Meanwhile, Indian bond yields have been considerably more stable than the rise in US Treasury yields might suggest, providing another indication of resilience in India’s underlying macro fundamentals.
What could unlock the relative opportunity?
A more supportive valuation starting point becomes particularly relevant when accompanied by identifiable catalysts. The first potential catalyst is a moderation in the global forces that have worked against India. If oil prices stabilise and expectations for developed market rate increases become less aggressive, pressure on the rupee and foreign investor positioning could ease, allowing domestic fundamentals to play a larger role in market performance.
The second is an eventual broadening of the earnings cycle. The extraordinary profit growth currently concentrated in technology heavy markets is unlikely to accelerate indefinitely. Consensus expectations point to a more balanced earnings picture in 2027, with profit growth moderating in some of the largest AI beneficiaries while India’s earnings trajectory becomes comparatively firmer. The AI cycle does not need to reverse for this relative picture to improve; the gap between AI driven earnings growth and the rest of the market simply needs to narrow.
Global country EPS growth in 2026 and 2027
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Source: Refinitiv, IBES, HSBC Asset Management, September 2026
This is particularly relevant because India offers a very different sector mix. As investors increasingly consider concentration and capital intensity within the global AI trade, India offers exposure to a broader set of earnings drivers rather than another geographic expression of the same cycle.
AI can still become part of India’s opportunity
Being relatively underexposed to AI hardware does not mean India is excluded from the technology cycle. The first stage of the global boom has rewarded the manufacturers of semiconductors, memory and computing hardware. The next phase could increasingly favour the deployment and adoption of that technology. India combines inexpensive data, a large digitally connected population and relatively low-cost power, while installed data centre capacity is expected to rise from around 1.3GW towards 10.5GW by FY31. Falling technology costs could therefore support adoption in much the same way that cheaper mobile data helped accelerate smartphone penetration.
Rising data center capacity in India (GW)
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Source: Morgan Stanley estimates, HSBC Asset Management, June 2026
India’s manufacturing renaissance in progress
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Source: BofA, UNIDO, September 2026
The opportunity extends beyond digital adoption. India is also seeking to capture a larger share of global manufacturing as supply chains diversify. Government incentives, shifting global supply chains and new trade agreements are encouraging investment in semiconductors, defence, critical minerals and other strategic industries. India currently accounts for around 2.8 per cent of global manufacturing, with manufacturing value added of close to USD500 billion, leaving considerable room for its share to expand as investment and supply chains broaden. A larger manufacturing base can deepen domestic supply chains, broaden employment, increase investment and complement India’s established strength in services.
Broadening, but a different role for India
India has faced an unusually challenging combination of higher oil prices and an AI led global capex cycle, but its investment case does not depend on either trend reversing. AI investment can remain strong while market leadership broadens. Oil prices can remain elevated while lower energy intensity and stronger external buffers reduce their impact. Global yields can stay higher while healthier domestic balance sheets support resilience.
What differentiates India is the composition of its growth. Markets that have benefited most from the current cycle which is increasingly concentrated in a narrow set of technology related earnings drivers. India offers something different: a broader sector mix, improving domestic earnings, stronger macro buffers and growing exposure to structural themes ranging from manufacturing to digital infrastructure. Recent relative underperformance has also improved the entry point. Foreign ownership is light, relative valuations have become more attractive and domestic investors continue to provide a stable source of capital.
For investors, the next stage of the global cycle may place greater value on diversified earnings growth, domestic resilience and structural investment themes that are less dependent on a single source of global capex. As market leadership broadens into 2027, those characteristics should give India a more differentiated role within global and emerging market portfolios.
Interested in exploring India’s investment opportunities?
If you have questions for our experts or would like to learn more about how you could access these opportunities, please get in touch with your HSBC Asset Management contact.
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For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. The views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target. This document provides a high-level overview of the recent economic environment. It is for marketing purposes and does not constitute investment research, investment advice nor a recommendation to any reader of this content to buy or sell investments. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. Source: HSBC Asset Management, 30 September 2026.
Past performance does not predict future returns. Diversification does not ensure a profit or protect against loss. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security.
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