India’s allocation in global emerging markets hits 5-year low: Citi

Global investment flows are sharply recalibrating, with Citi Research dramatically lowering its 12-month Nifty target to 26,000 from 27,000. This steep revision comes as India's allocation in global emerging market funds plummets to a five-year low of 11%, a stark decline from 20% in mid-2024. The pivot reflects growing investor concerns over India's limited participation in the foundational global AI infrastructure build-out, compounded by persistent geopolitical tensions in West Asia and a broader shift in capital towards more direct AI plays. The re-evaluation signals a significant cooling of foreign institutional investor sentiment, with FIIs now holding a nearly 20-year high underweight position on Indian equities, responsible for an estimated $30 billion in outflows year-to-date in 2026. While India's market previously benefited from a 'China-plus-one' strategy, attractive valuation in China post-stimulus, along with elevated US bond yields, are drawing capital away. India's higher valuation, trading at roughly 21 times forward earnings against an EM average of 13, are proving increasingly difficult to justify amidst slowing corporate earnings and softer consumer demand. This trend is particularly evident as the MSCI Emerging Markets Index has outperformed the Nifty 50 in recent months. Looking ahead, the immediate trajectory for Indian equities hinges on an easing of West Asia tensions and a potential moderation in global AI optimism, which could alleviate FII outflow pressures. Despite the near-term headwinds, Citi maintains a constructive medium-term outlook, acknowledging India's low foreign ownership and the robust, record-high domestic institutional inflows that continue to provide a crucial buffer. India's ambitious government-backed IndiaAI Mission and substantial domestic and foreign investments in AI-ready data centers could eventually shift the narrative, especially as AI value creation potentially migrates from infrastructure providers to software and services beneficiaries.