Why global investors are turning cautious on India despite its growth promise

Global investors are turning cautious on India despite its strong long-term growth promise, as concerns around artificial intelligence (AI) disruption and a recent slowdown in positive economic surprises weigh on sentiment, according to Jacob Pedersen, Head of Equity Research at AL Sydbank.

Pedersen said that while India continues to be viewed as a structurally attractive market, near-term hesitation among investors has increased. “I do not think anyone looking at India from the outside has any doubt about the growth potential and the potential for economic growth, or the reforms being made,” he told CNBC-TV18. However, he noted that “things have maybe not been as strong recently—we have had fewer positive surprises from the Indian economy over the past couple of quarters,” which has contributed to a cooling in valuations.

A key factor behind the cautious stance is the global shift towards AI and technology-led investing. Pedersen pointed out that this trend may not favour all emerging markets equally. “Investors are still somewhat reluctant to just pour money into India, especially because the shift to AI is mainly viewed as a potential negative for some of the big industries in India,” he said.

The evolving global market cycle is also influencing allocation decisions. Pedersen explained that if technology-driven leadership returns, capital is likely to flow towards markets with stronger exposure to AI and advanced technology ecosystems, particularly in parts of North Asia. This could limit flows into markets that are less directly aligned with the AI theme in the near term.

More broadly, he highlighted that emerging markets, including India, still offer relatively attractive valuations compared to developed markets such as the US and Europe, alongside better long-term growth prospects. “No matter how we twist or turn it, the region as a whole has better growth implications and better growth opportunities than… Western markets a couple of years out into the future,” he said.

However, he cautioned that high expectations for earnings growth across emerging markets would need to be met for sustained outperformance.

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On India specifically, Pedersen said the market remains compelling over the long term but is not currently the top preference for global investors. “From our point of view, it is definitely not the highest in the pecking order, but still a market with a lot of growth potential,” he said, adding that “in the short term, we are a bit more reluctant.”

His comments suggest that while India’s structural story remains intact, near-term flows could stay measured as global investors weigh AI-driven opportunities elsewhere and await stronger economic momentum.