AI-Driven Rotation Erases Five Years of India Equity Outperformance as Capital Flees to South Korea and Taiwan

AI-Driven Rotation Erases Five Years of India Equity Outperformance as Capital Flees to South Korea and Taiwan​

India-focused equity funds have seen their dominant position over global emerging markets (GEM) evaporate as a massive shift in investor sentiment toward AI-driven markets takes hold. According to Elara Securities, this rotation has effectively unwound nearly five years of relative outperformance for India-dedicated long-only funds since 2021.

The brokerage reports that the relative performance of these funds has plummeted back to April 2021 levels. This sharp reversal follows a powerful AI-led rally that redirected global capital toward South Korea, Taiwan, and commodity-linked markets.

Structural Shifts in Global Capital Flows​

Between April 2021 and September 2024, India’s superior performance was bolstered by strong earnings growth, deep domestic liquidity, and persistent concerns regarding China. However, the current landscape shows a significant pivot toward different geographical priorities.

Global investors continue to favor US equities, which drew $16 billion in inflows during the most recent week after recording $27 billion the previous week. While some shift occurs, the emergence of new leaders in the GEM space is becoming increasingly evident.

GEM funds recorded their first weekly inflow of $1.8 billion this week, marking a notable turn after 10 consecutive weeks of outflows totaling $13 billion. This turnaround was spearheaded by significant interest in South Korea.

Record Inflows Into South Korean Equities​

The concentration of capital into South Korea has been remarkable, with foreign inflows reaching a record $4.8 billion as the market corrected to its 100-day moving average. This specific level has remained consistent through every pullback since the AI rally initiated in May 2025.

In contrast, India and China continue to experience net outflows, though the intensity of redemptions has shown signs of moderating. India recorded weekly outflows of $95 million, a significant decrease compared to the average weekly outflow of approximately $400 million observed over the past three months.

India-dedicated funds also saw another $200 million in redemptions during the same period. While the trend remains negative, the cooling of the redemption pace provides a nuanced view of current market dynamics.

Historic Valuation Gauges and Potential Turning Points​

Elara highlights a striking historical data point regarding the valuation gap between India and South Korea. The ratio of India's equity market to South Korea's in US dollar terms has retreated to support levels last observed in 1996 and 2002.

This represents one of the deepest phases of India’s relative underperformance in nearly three decades. Historically, these types of multi-decade support levels have often aligned with significant turning points in relative performance for emerging markets.

While the current environment remains complex, the brokerage suggests that the recent stabilization indicates a potential peak in the trend. The report notes that while it is still early, the pace of India's relative underperformance may be nearing exhaustion.