India is the one large market not in the AI trade. That’s now an asset, not a shortcoming

Technology, counting IT and communication services together, is now 41% of MSCI ACWI market cap — larger than at the dot-com peak. And within it, the entire move has come from hardware and semiconductors, not software.

A large part of the reported capex is price, not capacity. Some HBM and memory prices have multiplied 20 to 30 times in a year. GPU rental pricing and the semiconductor producer price index have both moved sharply higher, which means nominal spend is overstating real capacity creation.

Funding is increasingly moving from cash flow to debt — having been almost entirely cash-flow-funded until recently. And China is undercutting on price with open-weight models while adding grid capacity in a single year equal to all of Germany’s — which puts the incumbents’ revenue visibility, and therefore their funding, at risk.

India sits outside the AI hardware trade almost entirely. IT services are now just 7.4% of the Nifty — below the global financial crisis low of 8.8%. That composition, until recently framed as a lack of exposure, is now the setup.

All of MSCI EM’s return this year has come from technology, and within technology from semis and hardware. India’s more diversified market composition — software-heavy, semiconductor-light — could become a diversification advantage if the semiconductor and hardware trade normalises.

Indian valuations have quietly reset. Nifty price-to-book is below its long-term average on both trailing and forward, at levels last seen in December 2020 but with materially higher ROEs. The same price, better quality.

Out of the BSE 1400-plus universe, 450 to 500 companies now screen as bargains, with sub-20-times multiples available across financials, IT, select healthcare, auto and insurance. That is a large enough set to build a genuinely better-quality portfolio — a set that simply did not exist in 2024.

Two flat years have delivered a time correction rather than a price correction. The Nifty has spent over 103 days below its 200-day average with modest drawdowns — which is exactly the starting point that improves forward returns.

Reset long-term return expectations to 10 to 12% before costs. Domestic sales growth tracks nominal GDP at 10 to 12%. Export growth lands at 7 to 11% including currency. Margins are already at lifetime highs with little room to expand.

Earnings growth is capped there. And equity returns follow earnings.

That reset is not bearishness — it’s arithmetic. Low recent returns normalise the long-term rolling CAGR and raise the probability of better returns ahead. This is the good version of a bear market.

Large caps: Nifty price-to-book is below long-term average with ROEs well above December 2020 — the same price for better quality. Price-to-earnings is between average and fair — the market was close to fair value at the March lows and sits roughly 10% above that now. Not cheap, but not demanding.

Mid and small caps: selective only, and only through active funds and SIP. Median multiple of 38 across the 400-stock cohort, with prices close to lifetime peaks against large caps. One or two quarters of price performance is noise, not a signal — in either direction.

On leverage: ₹1.95 lakh crore of MTF, bank and NBFC market lending is 0.41% of market cap and 0.87% of free float. Not alarming against the US at 2.15% of free float, but leverage never creates a trend — it only amplifies one.

Industrial credit, capital goods IIP, cement volumes and corporate capex have improved for two to three quarters, but the pickup is not broad-based yet — recent investment announcements are skewed towards data centres and nuclear power.

It broadens only when roads, railways, ports, housing and real estate join in. Central government capex has slowed and may stay slow in FY27 — though the overall picture is still better than FY25 and FY26, and the private side is now doing the work.