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15 December 2025
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Despite AI fears, geopolitical conflict, and ever-changing tariff policies, markets have (for the most part) ticked along reasonably well this year.
Even after April’s dip, the S&P 500 has recovered, and the FTSE 100 has enjoyed a much more positive year than it has in some time. But one of the world’s top markets over the past decade, India, has quietly sunk down the charts.
Why have Indian shares struggled?
The mysterious thing about investors’ declining enthusiasm for India is that nothing very significant seems to have changed. The demographics of the region have stayed positive for growth, with a large and growing working age population, and the country has improved corporate governance by introducing fresh regulations on its companies in recent years.
On the flipside, valuations were fairly elevated after a strong long-term showing for Indian shares, so a correction was always a possibility, and India slipped in terms of real GDP growth last year, with the rate easing to about 6.6%. While this was still far faster than even other emerging economies, which averaged 4.2%, it was enough to spook some investors.
Gaurav Narain, principal advisor of the India Capital Growth Fund, says: “One reason was because you had elections last year. You have a three-month period before the election and a three-month period after the election where the investment cycle comes to a halt. The second reason was self-created.
“This was the central bank, which was very worried that credit was too strong at about 16% and they wanted it around 10%. What they did was really tighten the system, and specific areas like unsecured lending had a lot of regulatory caps.”
This year has so far looked more positive for India’s growth picture. For the April to June period in 2025, year-on-year GDP growth had rebounded to 7.8%, according to Deloitte.
India also felt a bump, like many other nations, from tariff threats. However, this has proved to be mostly inconsequential for businesses there, with a small portion of exports going to the US according to FundCalibre research director Juliet Schooling Latter.
“External risks, including renewed US tariffs, have stirred headlines but not fundamentals. Exports to the US represent only roughly 2.5% of GDP, and India’s growth is powered overwhelmingly by domestic demand, urbanisation and digitalisation,” Schooling Latter says.
India is lagging behind on AI
A clearer explanation of what has held India back this year is what the country doesn’t have. Namely, a meaningful footprint in artificial intelligence. In the past few years, investors have been willing to brave lofty valuations for AI exposure, and while this can be found in other emerging markets, there is little presence in India.
“The only theme India is not playing is artificial intelligence,” Narian says. “We have a thriving services economy but no real AI play, and a lot of people think India has underperformed simply because we don’t have an AI play. As some people say, India is the best ‘anti-AI’ market.”
As Narian hints, amid mounting fears of an AI bubble, this could end up being a positive. The history of strong returns could make it an attractive option to investors that are losing faith in AI.
“Global investors have rotated into AI themes in North Asia, temporarily trimming Indian allocations, although domestic inflows reached a nine-month high in July, underscoring local confidence,” Schooling Latter says.
This local confidence is a key factor. Although global investors have stripped back their India allocations, those in India have poured more into their own market, taking advantage of its relative underperformance. While the past year has been more difficult for Indian markets, this has allowed the market to stay in the black despite waning overseas interest.
And the long-term figures are still strong. MSCI’s India index has returned 8.4% this year, and 114.2% over the past five years, in local currency.
This is better than the S&P 500’s own showing over five years, which sits at 101.2% in US dollar terms. But just like the US, India still has elevated valuations. This may have contributed to investors looking elsewhere in the emerging markets space. However, if AI worries keep building, a resurgence for Indian stocks could be on the cards.
Hannah Williford: Content Writer
Hannah joined AJ Bell in 2025 as an investment writer. She was previously a journalist at Portfolio Adviser Magazine, reporting on multi-asset, fixed income and equity funds, as well as macroeconomic impacts and regulatory changes...
