FII flows continue to be negative again in April, even as Indian equities staged a broader recovery. The usual suspects – oil import bills, rupee depreciation, unfavourable tax treatment — have been discussed at length. But there’s a more powerful force redirecting global capital that deserves attention: the AI investment boom reshaping equity allocations worldwide.
India’s Shrinking Weight in EM Allocations
India’s weight in the MSCI Emerging Markets Index has fallen from ~20% in late 2024 to just 12% as of May 2026. Taiwan, riding the semiconductor and AI wave, now commands roughly 25% – more than double India’s share. TSMC alone carries more index weight than all of India Inc.
The Earnings Gap Driving Reallocation
The weight shift isn’t arbitrary — it’s earnings-led. Taiwan and Korea posted earnings growth of 50% and 200% respectively over the past year, dwarfing India’s 15%. Even after the big moves in their Indices, both trade cheaper: Taiwan at 18x and Korea at 8x, versus India’s 20x P/E.
PAT estimates this year, Samsung leads at $250 billion, SK Hynix at $150 billion, and TSMC at $100 billion — against India Inc.’s aggregate of roughly $200 billion.
The AI Capex Machine – And Its Fragilities
AI capex is projected to grow at a 35% CAGR through 2027. Morgan Stanley now estimates hyperscaler spending approaching $805 billion in 2026 and $1.1 trillion in 2027. As long as this spending accelerates, capital will chase AI-linked equities.
Hyperscaler Capex Estimates (2024–2027)
But cracks are forming. Until recently, this capex was funded by internal cash flows. At current run rates, free cash flow is fully consumed. Incremental funding now comes from debt and circular financing arrangements between NVIDIA, OpenAI, and cloud providers — a structure that works until investors demand standalone unit economics. Add physical bottlenecks in power equipment and semiconductor supply chains, and the AI capex story looks more fragile than consensus assumes.
What This Means for India
India currently sits at a 14-year low in foreign institutional ownership. Our equity market is built on domestic consumption, financials, and infrastructure — a steady, earnings-based compounding story with no exposure to the AI capex cycle. That’s a vulnerability today, but becomes an advantage the moment the AI hardware cycle stops accelerating. When that inflection arrives — and the funding and supply-chain signals suggest it may be closer than the market thinks — global allocators will rotate out of Korea and Taiwan toward secular, consumption-driven emerging markets. India is the most natural destination for that rotation.
How should you position your portfolio for that shift? Get in touch with us.
