Wall Street is in good shape this year despite the Iran war, rising oil prices, soaring inflation and bond yields. Artificial Intelligence (AI) has been responsible for this stock market resilience as the tech-heavy Nasdaq-100 is up over 20% and the S&P 500 has gained about 13% (as of Sept. 25, 2026).
However, the story is not similar in emerging economies. This is especially worrisome for economies like India, which is dependent on imported oil and seeing its stock market under pressure. Note that large-cap iShares India 50 ETFINDY is off 15.3% this year. China is also not far behind, with iShares China Large-Cap ETFFXI shedding about 14.7% in the first nine months.
Let's delve a little deeper.
Why Foreign Investors Are Pulling Back From India: Valuation Concerns?
Global brokerage Bernstein believes India's high stock-market valuations are becoming increasingly difficult to justify, particularly as large companies struggle to adapt to rapid technological change, as cited in CNBC.
Bernstein said many large Indian companies lack the growth to justify high valuations and are reluctant to invest in emerging sectors like EVs and semiconductors, discouraging foreign investors.
India's Mid- and Small-Caps Show Greater Growth Potential
Bernstein acknowledged the stronger growth potential of small- and mid-cap companies but noted that their limited scale, liquidity, free float and analyst coverage make them less attractive to large institutional investors. No wonder, iShares MSCI India Small-Cap ETFSMIN is up 0.2% this year and has surged about 20% over the past six months.
Is India an Anti-AI Trade?
India's IT sector faces growing pressure from rapid AI adoption, with the industry accounting for more than 8% of the Nifty 50. The lack of a clear domestic AI leader and potential disruption to traditional IT services have increasingly positioned India as an "anti-AI" trade.
China Underperforming Despite Being Pro-AI
Investors seeking greater exposure to AI may need to look beyond broad emerging-market strategies and focus more specifically on China, according to Matthews Asia portfolio manager Andrew Mattock, as quoted on CNBC.
However, China tech ETFs are also underperforming this year. KraneShares CSI China Internet ETFKWEB has lost about 31%. Several China AI-focused ETFs have been launched lately, but are yet to trade in the green. China AI Tigers LLM ETFTGRZ is off about 36%, having launched in late August. Defiance China Robotics ETFCROB has fallen about 15% since its launch on Aug. 18.
In contrast, Defiance China Memory ETFCRAM is up about 1% since its inception on Sept. 10. So, a more targeted approach may be necessary even in AI trade becauseall themes do not offer the same potential (read: Want to Play China AI Companies? 5 Pure-Play ETFs in Focus).
China's AI Gains Face Market Challenges
China's AI advances have yet to generate broad market gains that attract foreign investors at scale. Policy communication (including around anti-corruption probes) and unexpected information disclosures sometimes add to uncertainty, contributing to market volatility, according to WisdomTree's Liqian Ren, cited by CNBC.
Moreover, large Chinese platforms are still in the "heavy investment, light return" phase: AI capex and R&D are rising, while monetization through advertising, cloud and AI applications is yet to gather enough momentum to receive a favorable rating, per J.P. Morgan. China's listed universe has more software/platform exposure and fewer hardware enablers, which are dominant currently.
Slowing Growth an Issue for China
Chinese equities have been under pressure due to slowing growth, weaker domestic demand, and the property market crisis, which continue to weigh on investors' confidence. China's Q2 2026 GDP came in at 4.3%, below expectations, per Reuters.
Falling property prices create a negative wealth effect, keeping households cautious and the savings rate elevated, which limits the rotation into risk assets like equities.
South Korea & Taiwan: AI Hardware Beneficiaries
Global investors have favored Korea and Taiwan as more direct AI hardware beneficiaries. iShares MSCI South Korea ETFEWY is up about 88% this year as EWY is heavy on SK Hynix and Samsung (read: South Korea ETFs: A Short-Term Pullback, a Long-Term Opportunity).
iShares MSCI Taiwan ETFEWT is also benefiting this year (up about 77%) thanks to 20% exposure given to TSMC shares (read: ETFs Primed for Gains on NVIDIA's $150B AI Spending Vow in Taiwan).
Bottom Line
China's AI outlook could improve as companies shift from heavy investment toward stronger monetization, benefiting AI-focused ETFs, while broader economic weakness may continue to weigh on broad-based China ETFs.
Meanwhile,Bernstein views India's capital outflow as a structural issue, with a need for stronger growth, greater investment in emerging technologies and more reasonable valuations to attract foreign capital.
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This article originally published on Zacks Investment Research (zacks.com).
