Why is the Indian stock market underperforming?
What's the story
Motilal Oswal Financial Services has said in its latest strategy report that India's underperformance against major global markets is mainly due to the global artificial intelligence (AI) rally, and not a weakness in the domestic economy. The report cites South Korea, Taiwan, and the US as markets that have significantly outperformed India owing to their strong exposure to global AI trade.
Market dynamics
Structural factors behind India's underperformance
The report highlights that India's lesser participation in the AI-led rally is mostly 'structural' in nature. It explains that India's low exposure to AI hardware and the concentrated nature of the global AI rally have limited participation, thus overstating overall market weakness. The brokerage also noted that once IT services are excluded, India's broader market performance appears relatively resilient.
Performance comparison
Global market performance in 2026
The report compares the performance of various markets in 2026. It notes that South Korea is the best-performing market globally, up 53% in USD terms. Taiwan and Brazil follow with gains of 33% and 28%, respectively. In contrast, India's Nifty has declined by 13% in USD terms during this period.
Market outlook
Potential shifts in foreign investor flows
The report suggests that any moderation or unwinding of the global AI trade could shift foreign investor flows toward domestic growth-oriented markets like India. It said, "With AI trade having run for an extended period, any potential unwinding or rotation could redirect FII flows toward structurally strong domestic growth markets like India." This indicates a possible future trend in investment patterns.
Defense market
Geopolitical tensions boost defense stocks
The report also highlights rising geopolitical tensions as a key driver for the sharp rally in global defense stocks. It says, "Rising geopolitical tensions and the resultant surge in defense spending and orders have driven a significant turnaround in global defense companies." The aggregate market capitalization of global defense companies grew at a compounded annual growth rate (CAGR) of 19% during CY21-CY26 YTD to $3.5 trillion.