The Indian stock market logged a highly volatile trading session amid a sharp sell-off in IT stocks, persistent global uncertainties, and continued caution among investors. Selling pressure dominated the first half of the session, dragging the NSE Nifty 50 benchmark index lower towards the 23,151.50 mark. However, strong buying interest at lower levels triggered a sharp recovery in the latter half, helping the market erase a significant portion of its intraday losses to close around 23,400 levels.
India Inc recently concluded the January-March quarter earnings season reporting a better-than-expected growth despite the current geopolitical headwinds. Amid the churn of the global tech cycle, India still lacks an AI trade, as highlighted by experts. Foreign Institutional Investors (FIIs) have been pulling out of India for the past 18-24 months to chase spectacular earnings growth in tech-heavy markets such as South Korea and Taiwan, which are heavily tied to global AI and semiconductor capex.
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According to Jonathan Garner, Chief Asia and Emerging Market Equity Strategist at Morgan Stanley, this shift is less about structural flaws in the Indian economy and more about the explosive, AI-driven earnings growth pulling foreign capital into North Asian markets. In an exclusive interview with NDTV Profit on June 3, Garner emphasized that India is not the primary problem among emerging markets. Rather, it is the relentless outflows by foreign investors who are chasing North Asian AI stocks.
The North Asia vs. South Asia Divide
Despite recent downgrades from foreign brokerages, the underlying fundamentals of the Indian market remain resilient. Garner stressed that the earnings outlook for India is still constructive, with expected EPS (earnings per share) growth of around 15% on a 12-month forward basis. Meanwhile, valuations have cooled from their peak. So, why are FIIs selling Indian stocks? The answer lies in the phenomenal growth happening elsewhere, according to the Morgan Stanley strategist.
''Investors are witnessing record-breaking earnings growth in North Asia, driven primarily by the upstream semiconductor and AI technology boom,'' said Garner. For instance, South Korea is expected to see a staggering 230% year-on-year earnings growth this year. Taiwan is pegged at a 30% or higher growth rate, while Japan is also delivering very strong numbers, as per Garner. As a result, global capital is reallocating away from consumer-heavy markets like India, Indonesia, and Philippines, and aggressively moving into the tech-heavy markets of North Asia, according to Morgan Stanley.
''We raise our base case EM and TOPIX targets moderately to reflect another six months of earnings growth, while holding our multiple assumption unchanged. We expect 40% EPS growth for MSCI EM in 2026 dropping to 9% in 2027,'' said Morgan Stanley in its 2026 mid-year outlook. ''In general, we view the rally in EM as cyclical rather than the start of a new secular bull market,'' it added.
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The AI Super-Cycle
Addressing concerns about whether the AI tech boom has peaked or valuations have become too risky, Garner was notably bullish. He pointed out that the rally is broadening beyond just memory chips into CPUs and other adjacent AI hardware. Morgan Stanley expects this strong thematic environment to persist not just through 2026, but all the way through 2027. Investors likely will not see a fade in upstream AI capex growth rates until early 2028 at the earliest.
According to Garner, the key takeaway for the next 12 months is that global earnings revisions will dictate the market flows. ''Going forward, we expect continued strength in industrials, semiconductors, and upstream energy/copper, while the consumer sector will likely remain under pressure globally,'' he said. According to estimates from the mid-year outlook report, Morgan Stanley's new base case targets stand at 4,300 for TOPIX (+12%) and for 1,800 for MSCI EM (+5%).
''We would therefore moderately prefer Japan in aggregate and would invest FX-unhedged. That said, we view the current environment as exceptionally uncertain due to the combined effect of the global energy shock and impact of AI capex and disruption. We continue to set unusually wide bear to bull target price spread,'' said the global brokerage in its report.
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