The global race to capitalize on artificial intelligence has reshaped Asia's investment landscape, helping Taiwan and South Korea leapfrog India in global equity market rankings within just one week.

Technology giants linked to the AI supply chain, including TSMC, Samsung and SK Hynix, have attracted massive investor interest in 2026, pushing valuations to unprecedented levels. The surge has boosted both Taiwan and South Korea's stock markets, while India has struggled to maintain investor confidence amid slowing domestic growth and earnings concerns.

Foreign investors have continued to pull money out of Indian equities, selling $27.6 billion worth of shares since January. By comparison, net foreign outflows totaled $18.9 billion throughout all of 2025, according to data from the National Securities Depository Limited (NSDL).

The shift has been reflected in market capitalisation rankings. Taiwan's stock market value approached $5 trillion and overtook India on 26 May to become the world's fifth-largest equity market. Less than a week later, South Korea also moved ahead of India, pushing the country into seventh place among global equity markets.

The reversal is striking considering India's dominant position only 18 months ago. Bernstein analysts noted that India's market capitalisation was approximately 3.5 times larger than South Korea's and more than double Taiwan's during that period.

For much of the past decade, India was regarded as one of the world's most attractive equity markets. However, investor sentiment has shifted dramatically as concerns grow over slowing consumption, weaker corporate earnings and elevated valuations.

Unlike Taiwan and South Korea, India lacks a major publicly listed artificial intelligence or semiconductor champion. The AI boom has become one of the market's most powerful investment themes, with investors increasingly concentrating capital in companies expected to benefit directly from growing demand for advanced chips and AI infrastructure.

The performance gap has been substantial. Since the start of the year, South Korea's Kospi 200 index has surged more than 130%, while Taiwan's FTSE TWSE 50 has gained over 60%. In contrast, India's benchmark stock indices have declined more than 10%, making them the only major Asian market currently in negative territory.

Analysts argue that India's absence from the AI supply chain has reduced its appeal relative to regional peers. The country has yet to develop a significant semiconductor manufacturing ecosystem, while many of its technology companies remain focused on traditional IT services rather than capital-intensive AI initiatives.

However, market experts caution that the lack of an AI story is not the sole reason behind the decline in investor interest.

Valuations remain a major concern. Indian stocks are currently trading at approximately 21 times forward earnings, according to Alpine Macro data. That valuation is broadly comparable to Taiwan but significantly higher than South Korea, where equities trade at roughly nine times forward earnings.

Corporate earnings expectations have also weakened. Nomura recently reduced its earnings forecasts for the 256 largest Indian companies it covers by 4% for the financial year ending March 2027. The downgrade reflects concerns over higher input costs and economic disruption linked to ongoing tensions in the Middle East.

The changing sentiment is also visible within global benchmarks. India's weighting in the MSCI index has fallen to around 11%, down sharply from nearly 20% at its peak in 2024.

Beyond near-term geopolitical risks, investors are increasingly focused on structural challenges facing the Indian economy. Rising automation and advances in robotics are reducing the advantages traditionally associated with India's large pool of low-cost labour. At the same time, the rapid adoption of artificial intelligence is creating uncertainty about the long-term growth prospects of parts of the country's IT services industry.

While an easing of tensions in the Middle East could improve market conditions, analysts believe concerns surrounding valuations, earnings growth and India's position in the AI-driven economy may continue to weigh on foreign investor sentiment in the months ahead.

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