By Darius McDermott on 2 February 2026 – FundCalibre

This article originally appeared in Professional Paraplanner on 30 January 2026

Importantly, it was not just the data analytics or chipmakers who drove returns, but also those selling memory and storage products. However, there are growing concerns over just how narrow market leadership has become – and the lofty valuations of those AI-related leaders.

There is a growing consensus that 2026 needs to be the year that AI companies demonstrate a path to profitability to justify those elevated valuations. For example, the Goldman Sachs’ NonProfitable Tech Index has risen by over 100% from the lows of April 2025*. To put this into perspective, in 2020, the index soared over 300% before wiping out all its gains during the 2022 bear market. The fact is investors are piling back into speculative growth stocks.

In my eyes diversification has never been more important. But finding it is perhaps more challenging over the long term. Step forward India – a region with strong demographics, growth, few geopolitical concerns, strong corporate governance and a growing online economy. The trouble is, the investment world has spotted the trend, and valuations have in recent years reflected these tailwinds.

However, 2025 has been something of a roadblock to that growth as trade disruptions and geopolitical challenges saw India go through multiple downgrades. The current projections put India’s earnings per share growth for fiscal year 2026 at around 10%, compared with 12% for the previous year**. To put this into context, Indian equities are down 6% over the past 12 months – this comes at a time when emerging markets and global equities have risen 26% and 12% respectively***.

Clearly the cooling off in Indian equities has come at a time when other emerging markets (the likes of China and Korea) have forged ahead. However, muted foreign investor flows due to limited exposure to the AI theme also remains a key headwind. This is partially due to India’s late entry into the semiconductor space. India has started making moves to meet demand in the automotive, telecoms and industrial sectors with technology minister Ashwini Vaishnaw indicating the country could catch up with other major producers by 2032.

India now looks like an alternative AI play?

For the first time in a while, Indian equity valuations are not red hot. At the end of last year the MSCI India One-Year Forward P/E Premium versus emerging markets was below 60% – it has been higher than 100% on a couple of occasions since 2022. Franklin Templeton researchers forecast Indian companies should continue to maintain an EBITDA margin of around 20-22% – indicating an opportunity**.

Several tailwinds emerged during 2025, including the Reserve Bank of India cutting interest rates by 125bps to 5.25%. Cuts were also made to income tax and the goods and services tax, and inflation reached a multi-year low.

Steps are also being made on a trade deal with the US, a key overhead for the Indian economy, with hopes of securing a figure in the range of 15-25%. This could offer some relief for the weak Rupee, another deterrent for foreign investors.

We have to put these challenges into context; IMF growth estimates for India stand at a robust 6.6% for the 2025/26 financial year. Compare this with the US and the EU, which are on course to deliver 2% and 1.4% in 2026.

UTI Dynamic Equity manager Ajay Tyagi says there are several indicators to suggest conditions have become more supportive, citing valuations normalising and India’s 12-month forward price-to-earnings premium to MSCI Emerging Markets compressing by around 68%, bringing it close to five-year lows****. He says analysts forecast earnings growth of >15% per annum over 2026–27, while domestic flows remain resilient, with systematic investment plan contributions growing by more than 25% year-on-year****. He adds that the combination of a valuation reset, improving earnings visibility and strong local participation suggests recent underperformance may prove cyclical rather than structural.

Dipojjal Saha, a macroeconomist and product specialist at Ashoka India Equity Investment Trust, says while earnings growth has likely bottomed out and valuations are now are at about 10-year average levels, in their base case expectation, the market should broadly deliver returns in line with earnings growth, assuming no expansion or contraction in P/E multiples.

He says: “In our view, the opportunity to generate outsized alpha remains the most attractive aspect of investing in India. One of the reasons for the alpha opportunity is that India still remains a highly under-researched market and hence very inefficient. This makes it a fertile ground for bottom-up stock selectors. While there are strong opportunities across the market capitalisation spectrum, India has a vast, heterogeneous SMID-cap segment which is even less well researched and hence provides strong alpha generation potential.”

India has been an incredible long-term investment. It is also less exposed to the global economy, such as the S&P 500 (0.18) and MSCI World (0.30)^.  Falling valuations means the economy stands out as a growth market offering a long-term alternative to AI and now could be an excellent time for investors who have previously been wary of excessive valuations to reconsider.

Investors wanting exposure to a single country offering might consider the Chikara Indian Subcontinent fund, which focuses on high-quality, mid and large-cap companies which are benefitting from the domestic Indian growth story. Those who may prefer exposure as part of a wider emerging markets portfolio may want to consider the likes of the GQG Partners Emerging Markets Equity or the FP Carmignac Emerging Markets fund, which invest 31% and 16% respectively in the country^^.

*Source: Allianz Global Investors, 1 October 2025

**Source: Franklin Templeton, Bloomberg, 21 November 2025

***Source: FE Analytics, total returns in pounds sterling, 12 January 2025 to 12 January 2026

****Source: UTI

^Source: Alquity, December 2025

^^Source: fund factsheet, 28 November 2025