There appears to be growing pessimism among foreign brokerages and investors in India. Who is driving this sentiment?

The pessimism is mainly about India’s relative growth and not absolute growth. India’s economy has improved over the past two quarters, but compared to markets like the US, South Korea, Taiwan and even Japan, growth still looks less attractive. What is driving global growth right now is a huge artificial intelligence (AI)-based investment cycle – particularly around data centres, semiconductors, memory chips, energy infrastructure and manufacturing. Top U.S. hyperscalers are expected to spend nearly $800 billion in capital spending this year and more than $1 trillion next year. India is not yet fully integrated into this AI supply chain, which means it is not participating in the growth impulse to the same extent.

Apart from relative growth, what else is impacting investor sentiment towards India?

The second major concern is about the potential disruption of AI in India’s service-export model. India’s economy is heavily dependent on service exports, and there is a growing perception globally that AI could replace a significant portion of that work. I personally disagree with that view, but markets are currently concerned that AI could harm India’s medium to long-term growth prospects.

This is happening simultaneously with foreign portfolio investor (FPI) outflows and increased foreign investment by domestic companies, which together are putting pressure on the balance of payments (BoP). Tension is rising due to higher energy imports.

Do you think these concerns are temporary, or may they persist?

The AI ​​capex cycle is clearly going to be around for some time. However, concerns over India’s services exports will gradually subside as data begins to prove otherwise. In fact, April’s services-exports data surprised positively, and global technology companies have continued to expand hiring in India. This shows that they still see India as the best place to access skilled talent at scale. My own view is that AI can actually become a huge opportunity rather than a threat for India’s services sector.

How do you see the earnings growth trajectory evolving over the next year?

India introduced substantial stimulus last year through tax cuts, rate cuts and liquidity support. Its impact has now started becoming visible on earnings and it should become stronger going forward. If the West Asia conflict does not prolong, India’s relative growth gap compared to global peers should narrow. Once this happens, capital outflows should moderate and the BoP situation should also improve. Interestingly, while foreign investors have been selling Indian equities, foreign credit inflows have remained positive over the past few months. India’s potential inclusion in the Bloomberg Bond Index is a significant positive trigger. Some administrative issues related to investor registration, trading windows and withholding taxes still need to be resolved.

If those are addressed, India could see inflows of about $30 billion in bonds. The revival in the initial public offering (IPO) cycle will create new supply in the market and may encourage foreign investors to return. In that sense, strong IPO activity may ironically help revive FPI buying.

How attractive are Indian stocks at current valuations?

When I look at the relative valuation of India, it is the lowest I have ever seen in my 35-year career. The relative 12-month trailing performance is one of the weakest I have seen, and foreign investor sentiment is at a 16-17 year low. Therefore, I believe that the market has become excessively bearish on India.

From a contrarian perspective, this is usually the point where investors should start taking a constructive stance. If you take a long-term view – let’s say four to five years – then I think India is the most attractively priced equity market in the world.

What risks could derail this bullish outlook?

The biggest risks are external. One possibility is that a global crisis has arisen due to problems arising from excessive debt or an AI capex boom. Global debt levels have become high, although it is difficult to predict when this will become a problem. However, domestically, balance sheets are in very good shape – corporate, household and government finances are all much healthier than in previous cycles.

How serious is the broader risk from rising oil prices and the Middle East conflict?

The situation today is very different from crises like 1991, 2008 or even 2013. India’s oil intensity has declined rapidly over the past decade. In 2008, oil imports were accounting for 13 percent of annual GDP in July. Today, when oil is at $100 a barrel, the oil import bill is less than 4 percent of GDP. So oil alone is no longer a systemic threat to India. The risk mainly comes through currency depreciation. Currency depreciation is the effect of rising energy bills, FPI outflows and accumulation of outward FDI. The resulting effect is an increase in inflation, especially if the conflict continues for a long time.

You have talked about a big upcoming investment cycle in India. Which sectors will drive it?

I think five key sectors will drive capex over the next few years: energy infrastructure, fertilizers, semiconductors, data centers and defense manufacturing. We expect India’s investment-to-GDP ratio to increase from 31.5 percent to 37.5 percent over the next five years. This should lead to a significant increase in corporate profits as a share of GDP.

Which sectors look most attractive from an investment perspective?

From a valuation perspective, the financial position looks most attractive. The sector has gone through tough times, but now we are seeing improving growth, stable margins and low credit costs. From a growth perspective, consumer discretionary looks strongest – particularly auto, real estate, retail, travel, healthcare and education. The industry has the strongest growth outlook due to the capex cycle, although valuations there are already rich.

What is your view on the IT sector amid AI disruption concerns?

This is a dark horse. The next few quarters could remain challenging as global companies try to showcase AI integration while cutting technology spending elsewhere. But in the long term, India remains the most cost-effective place in the world to build AI-related solutions. AI reduces coding costs, but it actually expands the market for Indian IT companies. IT service companies are engineering companies, not just coding companies. AI is a tool that improves productivity.