Indian equities: foreign selling slows, earnings diverge, and AI listing opportunities expand
Goldman Sachs sees room for investors to reduce their underweight positions in Indian equities, but a recovery in sentiment still depends on energy prices easing. Earnings reports have yet to drive broad earnings upgrades, while private AI companies could expand the universe of listed investments over the next 2–5 years.
Original source：Goldman SachsFirst published on Unhidea：Original source date：
Key takeaway
Goldman Sachs maintains a neutral allocation to India: improving foreign investor positioning offers room for a recovery, but energy prices and divergent earnings constrain the near-term assessment, while potential AI IPOs mainly alter the investable universe over the medium term.
Foreign selling pressure is easing. Why are equities still falling?
After foreign investors sold a net approximately 9 billion dollars of Indian equities from September through early October, net outflows have fallen close to zero over the past two weeks. Yet NIFTY still fell approximately 2% this week, while mid- and small-cap stocks fell 6%–7%. Stabilizing flows are still some way from stabilizing share prices.
Goldman Sachs believes foreign selling over the past two years has offset inflows from the preceding decade, leaving room for money to return given low positioning. Investors seeking AI diversification opportunities may also generate demand. However, a recovery in sentiment requires sustained relief from high energy prices; as of 23 October, Brent crude was at 116 dollars a barrel, up 5.6% for the week.
The underweight is narrowing. How much room remains to rebuild positions?
As of the end of September, active emerging-market funds managing approximately 220 billion dollars had increased their allocation to India relative to the benchmark by 15 basis points over the past month and 45 basis points over the past three months, the largest increase among the markets in the group. Yet India remained underweight by approximately 160 basis points. The change represents a reduction in the underweight, with an overweight still a long way off.
Across a broader universe of global active long-only funds, the actual allocation to India was 2.4%, versus a benchmark of 4.1%, an underweight of approximately 175 basis points weighted by assets under management. On this basis, Goldman Sachs sees considerable room for positions to recover further.
Domestic capital is also flowing in: active equity funds recorded net inflows of approximately 4 billion dollars in September, up 30% month on month. But Goldman Sachs estimates their cash allocation at just 3.2%, close to a five-year low and below the ten-year average of 4.2%. Continued subscriptions and cash available to funds are two distinct sources of support.
Earnings reports look healthy. Why have they not yet driven earnings upgrades?
As of the report date, 49 MSCI India constituents had reported results for the second quarter of fiscal 2027: 39% beat expectations, 34% missed and 26% met them, with the average earnings surprise broadly zero. The number of companies beating expectations was slightly higher, but this did not translate into a significant aggregate earnings beat.
The divergence is concentrated across sectors: financials and investment-cycle sectors had more beats, while consumer-sensitive sectors and IT had more misses. MSCI India earnings forecasts for 2026 were broadly flat this week and remained down 3% year to date. Forecasts for the NIFTY Midcap 100 index over the same period were cut a further 1% this week; earnings pressure has not eased across the board.
How does private AI funding become a listed investment opportunity?
Private AI investment in India tripled in 2025 to reach 5 billion dollars, ranking sixth globally; Goldman Sachs expects it could reach a new high in 2026. These private companies form a pipeline of potential future listings.
Goldman Sachs estimates that potential IPOs over the next 2–5 years could add 50 billion–100 billion dollars in market capitalization to India's listed AI sector, with upstream enablers accounting for 66% and downstream applications for 31%. This increase would come from new companies entering the public market, rather than revenue or profit growth at existing listed companies.
The expansion could cover currently underrepresented areas such as data center operations, enterprise AI services, conversational AI, cloud services and healthcare AI. The change for the AI theme is therefore a broader choice of business types; realization depends on these companies' progress toward listing.
Why does Goldman Sachs still maintain a neutral allocation?
Goldman Sachs maintains a neutral allocation to India. MSCI India's forward 12-month price-to-earnings ratio is 18.5 times, approximately 0.3 standard deviations above its historical average since 2004. Low positioning offers room for a recovery, but overall valuation has not fallen below that long-term benchmark.
Sector preferences are more pronounced: Goldman Sachs is overweight banks, energy, utilities, telecommunications, internet and defense, and underweight IT, pharmaceuticals, and metals and mining. Its allocation stance retains sector distinctions and has not shifted broadly bullish because of easing foreign selling pressure or an expanded AI universe.
