India market is going to act like an AI-hedge: DSP’s Jay Kothari

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For nearly two years, Indian equities have lagged a world captivated by AI and semiconductors. In the Mint Money Guru series, Jay Kothari, ED and international business head, DSP Asset Managers, explains why that underperformance could set up a reversal—and what retail investors should watch as a wave of IPOs approaches.

It is going to be acting like an AI hedge because over the last two years, India has significantly underperformed the emerging markets and the world markets. In the last one year, it's been almost 40% underperformance compared to emerging markets, and in the last two years, cumulative underperformance has been almost 70%, which is something we have never seen before.

Hence, whenever this mean reverts, we believe India will outperform. In the pre-AI phase, India moved at almost 20% CAGR versus Korea and Taiwan, which were up 5-6%. There are companies which remain very strong in terms of earnings and ROEs, as against the last couple of years where the entire focus has been on segments of technology that are missing in India.

At the start of 2025, the problem was not just punchy valuations, but tariffs which the US put on India, and earnings growth got impacted. Currency started depreciating because of negative sentiment, and the demand scenario was not the best. FPIs , which held a good part of the Indian market, started selling.

All of that came together to make the performance not so good compared to what we've seen before. We feel the bulk of these variables have started turning. Earnings growth in the latest quarter hit a 10-quarter high. Retail flows are continuing to hold, plus many of the variables impacting India have now started reverting.

Globally, tech components as a part of industry and market cap, have both risen. In the All Country World Index, the industry proportion of tech has moved from 20 to 30%, and in emerging markets, it has moved from 20 to 46%.

Globally, all three components of tech—software, hardware, and semiconductors—are present. In India, there is only one. We do not have hardware and semiconductors, which have driven 50% of the growth in emerging markets and the world.

Emerging markets gave, let's say, 25% returns, and that entirely came from tech—within that, two-thirds came from just three stocks, skewing the returns.

Our view is that momentum in semiconductors and AI will exist as it's a structural story, but we don't think such valuations and earnings can go on forever. Whenever this mean reverts, we feel India has a fair chance.

Companies with growth potential that can participate in global and local trends, trading below their intrinsic value, that's where one needs to focus.

Large caps have underperformed by almost 20% over the last year versus mid and small caps, but you don't only buy large caps because they've underperformed, you need to feel there's growth coming back and that few segments are pretty good.

Banks are coming back.