In a note titled Thoughts From the Road, Chief Investment Officer Henry McVey said overseas investors are among the most underweight Indian public equities they have been in years, while remaining meaningfully overweight US assets.
“For long-term investors willing to look through near-term noise, this inflection point may prove increasingly important,” said McVey, adding: “India’s challenges are certainly real, but so are its advantages.”
Indian equities also posted their weakest relative performance in 2025 since 1998, weighed down by currency weakness, slowing earnings growth and fears that AI could disrupt the country’s IT services model.
“Sentiment across Mumbai and Delhi is clearly more muted than on prior visits,” said McVey, who recently visited India along with KKR co-founder Henry Kravis. “But the longer-term backdrop continues to improve.”
A key near-term overhang for Indian markets is the rapid adoption of generative AI and automation, which investors fear could undermine the labour-intensive IT outsourcing sector—long a pillar of India’s exports and equity markets.
McVey noted that in the first nine months of FY26, India’s top five IT firms added just 17 net employees, sharply lower than nearly 18,000 additions in the same period a year earlier. The firm said this suggests a faster-than-expected shift to AI-enabled delivery models, with revenue growth increasingly decoupling from hiring.
Indian equities underperformed global peers in 2025, while inward foreign direct investment has rolled over from its 2020 peak of about $60 billion.
McVey said he expects Indian equities to stabilise and potentially recover in the second half of 2026, supported by fiscal stimulus, easier monetary conditions and rising participation from domestic savers.
“Fiscal impulses, healthy credit creation, and rising capital markets participation by retirement savers all point to better earnings momentum in the coming year. As a result, we now think EPS for the country could grow in the mid-teens in 2026,” he said.
He pointed to lagged transmission from earlier rate cuts by the Reserve Bank of India, continued government capital expenditure, and improving trade dynamics following recent agreements with the European Union and the United States.
Beyond listed equities, KKR said India’s private markets have “come of age”, with deeper capital markets, more robust control deal activity and improving exit options through IPOs and secondary sales. Infrastructure remains a key focus area, particularly roads, renewables, transmission and logistics, supported by urbanisation trends and sustained government capex.
KKR noted that global investors remain structurally underweight infrastructure in Asia, creating scope for capital deployment.
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