Foreign investors could turn their attention back to India as capital rotates across emerging markets (EMs), although the country's premium valuations and an uncertain earnings recovery are likely to remain key considerations for investors, according to Herald van der Linde, head of Asia equity strategy at HSBC.
Van der Linde also believes the artificial intelligence (AI)-led rally, which has largely benefited markets such as Hong Kong and Taiwan, is yet to fully play out in India.
While "AI is one of the dominating trends in global markets," he said the optimism around the technology will eventually trickle down to Indian markets, even though its rollout in the country is likely to be slower.
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Against this backdrop, Indian equities traded higher on Wednesday. At around 10:30 am, the BSE Sensex was up 1.13% at 77,633, while the NSE Nifty 50 gained 1.03% to 24,231.70, led by buying in information technology shares ahead of the US Federal Reserve's policy decision.
On the global AI theme, van der Linde said Hong Kong and Taiwan have witnessed "overspending in AI," but added that investor enthusiasm for the sector is beginning to moderate.
"Suspect investors are moving away from the AI trend," he said, noting that price momentum in AI and chips is slowing down.
He, however, does not see crude oil posing a major risk to markets at current levels. "Crude is not concerning unless it crosses $100 a barrel," he said.
Despite his constructive view on capital flows, the HSBC strategist cautioned that Indian equities are still trading at elevated valuations.
"Indian market valuations are not low," he said, adding that investors continue to question India's earnings recovery, making corporate profit growth the key monitorable for the market in the coming quarters.
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