Why India missed out on the emerging markets rally
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Emerging markets (EM) have enjoyed a recovery in returns and investor sentiment during the past few months, mainly fueled by AI optimism. But one of the areas experts had pegged as a long-term winner just a few years ago is now noticeably absent from the EM conversation: India.
Cast your mind back five years ago and the investment industry was laser focused on India as an opportunity to provide some much-desired growth.
At the time, the world was still adjusting to the Covid-19 pandemic and assessing what had fundamentally changed. One of the major shifts was the redistribution of supply chains away from China as the epicentre of the pandemic, with India becoming one of the go-to options to fill the hole.
What put India in the spotlight?
India’s prime minister Narendra Modi had already embarked on his ‘Make in India’ program seven years previously, with the goal to transform India into a global manufacturing hub, but the exodus from China in the pandemic galvanised it, and investors took note.
Rob Secker, investment specialist at T Rowe Price and part of the Emerging Markets Discovery Equity Fund team, says the historic premium Indian equities traded on expanded during the pandemic and in the years after.
“Investors were attracted by the country’s resilient economy, strong earnings growth, and also by the fact that, in contrast to the region’s largest economy and market, China, India was outperforming on both a macroeconomic and market basis,” he says.
This layered on top of broader EM themes such as a rising middle class and a youthful population plus India’s status as the world’s largest democracy led to bumper returns.
In 2021 the IA India fund sector managed to snag the top spot out of all the Investment Association’s sector, with the average Indian equity fund making 28.3%. In contrast, the average IA China fund lost 10.7% that year.
Cut back to today though, and this rally has faltered, with India ranking bottom over the past 12 months and year-to-date in 2026, with the average fund down between 11% and 12% on average, respectively.
Three culprits: AI, China and Iran
The reason sentiment has come off the boil for India is three-fold, according to Abbas Barkhordar, manager of the Schroder AsiaPacific Fund.
First, is that India’s simply lacking competitive AI stock options, a miss given it’s the biggest investment theme of the moment.
The aforementioned EM equity rally is, like most of the market momentum to be found right now, based a handful of AI ‘winners’ and in this region, China, South Korea and Taiwan are taking the lead.
China has ChatGPT rival DeepSeek, though this is privately owned, while South Korea has Samsung and SK Hynix while Taiwan has Taiwan Semiconductor Manufacturing Company (TSMC), with the latter three all linked to the production of the semiconductor chips and tools needed to sustain the US companies’ major AI rollout.
“India really has very little in that space,” Barkhordar says. “If anything, India is viewed more as a potential loser from AI because so much of the traditional business models involve outsourcing, particularly around IT services for example is an area of big disruption.”
Mike Sell, head of global emerging market equities at Alquity Investment Management and manager on the firm’s dedicated Indian Subcontinent Fund, agreed that the lack of obvious AI plays was a major cause of the lackluster attitude he was seeing among other investors towards this market, but he countered that this could actually make it a selling point if investors are conscious of diversifying their portfolio away from AI-linked investments.
“I’m not saying that AI is not great, it absolutely is, and you want to own that in your portfolio. But that’s not the only thing you want to own,” he says.
The second catalyst is the resurrection of Chinese equities’ performance after it tanked during the pandemic.
DeepSeek made China a firm competitor in the AI race on the large language model side of things but it’s ability to quickly build up the data centres and infrastructure needed to push its domestic AI capabilities has solidified investors’ optimism about the opportunity it presents.
Nvidia chief executive Jensen Huang said late last year that it can take “about three years” to build a data centre in the US, but in China “they can build a hospital in a weekend.”
Sell said this was classically why sectors go in and out of style. Investors tend to follow the returns. He argues that India is especially vulnerable to this lack of long-term thinking from overseas investors because they tend to treat EM allocation as a one-in-one out approach rather than having a blend.
To him, China and India are not a like-for-like portfolio allocation but they are often treated as such as there is undoubtedly some crossover in terms of the long-term structural trends, there should be a tactical, deliberate allocation to either region for the right reasons, not one or the other when the returns tide turns.
The third headwind for India is the war in Iran, which is not an exclusive headache, but it’s especially vulnerable to the energy crisis since it imports more than half its energy from the Gulf states.
Rita Tahilramani, co-manager, Aberdeen New India Investment Trust says this was having negative knock-on effects for inflation, the currency and foreign investor sentiment.
Recent reports suggested that the country’s central bank would be forced to step in if the rupee continues to fall versus the US dollar.
Why India falls down on income grounds
Sometimes though, the underinvestment is driven by the type of stock investors are after, especially when they’re not purely focused on just growth.
AJ Bell recently covered how income funds were investing in a broader investment universe to achieve their desired dividends, and EM equities have become a more common source for global managers.
But JPM Emerging Markets Income Fund has maintained an underweight positions in India versus the MSCI EM index for more than a decade. Manager Omar Negya says it’s not a market which is “typically strong” for income as most companies prioritise reinvesting their profits for growth rather than paying out a dividend.
In the MSCI EM index, India makes up the fourth largest weighting at almost 12%, behind Taiwan (25%), China (23%) and South Korea (19%). In the JPMorgan fund, India makes up just 5.5%, a 6.4% deviation from the benchmark.
“The market is not a natural fit for the strategy given its typically rich valuations, in contrast to the value/quality style of the fund,” Negyal explained focusing instead on opportunities in Asia, China and Latin America.
Valuations: still on a premium
Schroders’ Barkhordar doesn’t prioritise income, but he has also held a long-term underweight towards India versus the benchmark because of the high valuations on Indian assets.
After a period of earnings downgrades in some sectors, valuations have now normalised to around 19 times, Aberdeen’s Tahilraman says, bringing them closer to the historical averages.
While Tahilramani is bullish on the outlook, Barkhordar says he’s maintained a “substantial underweight” (7.5% versus 13.5%) in India simply because it hasn’t delivered like other Asian equity markets.
Barkhordar is growth rather than income focused and says that looking back at 2021, valuations were “run very hard” as “people were very positive then because the market had done well. But to us, the valuations looked quite stretched”.
He says that even though they are still cheap now by historic standards, he’s not been pulled back in yet as the outlook on AI, Iran and energy and the currency is too unclear for his liking.
It’s not all doom and gloom
Barkhordar credits the Indian government’s work galvanising the country’s domestic growth, and on a geopolitical basis, India was in a less contentious position with the US and other major economies than China is, signing deals with the UK and EU for example, which Barkhordar says isn’t something to be ignored.
“There are potential long-term positives, which we’ve never lost sight of. But in the short term, they haven’t really been able to outweigh the other negatives, and valuations have been too high, he says.
“It’s really that combination. It’s not some big structural problem we have with India, which is still very attractive as the demographics are pretty good versus the rest of Asia.”
But for him to consider moving away an underweight position, Barkhordar would need to see some positive progress on the trifecta of headaches hanging over India’s investment case right now.
Eve Maddock-Jones: Funds and Investment Trust Writer
Eve joined AJ Bell in 2026 as a funds and investment trust writer. She was previously editor at Investment Week, reporting on all major retail investor news, covering funds and investment trusts, ETFs and regulation...
