Why is India falling behind Korea and Taiwan in AI race? Jefferies has answers

India's equity market has shown resilience as one of Asia's top long-term performers, buoyed by robust domestic consumption and key financial sectors. However, in the rapidly evolving landscape of artificial intelligence (AI), Jefferies reports that India is not capitalizing on the current investment wave as effectively as its regional counterparts, particularly Korea and Taiwan. According to Jefferies’ recent GREED & Fear report, the momentum generated by AI is predominantly concentrated in Korea and Taiwan, which are significantly benefiting from their advanced technology ecosystems. These nations are driving a substantial portion of earnings growth across Asia, while India appears to be lagging behind, particularly in the semiconductor sector. Jefferies analyzed projected earnings growth within the MSCI Asia Pacific ex-Japan index for 2026, revealing that Korea and Taiwan are anticipated to deliver a staggering 44 percentage points, making up nearly 83% of the total regional earnings growth. This strong performance is attributed to their deep integration in the semiconductor and memory-chip supply chains that fuel AI advancements. Companies within these markets are witnessing a surge in demand for AI servers and cutting-edge data centers. In stark contrast, India's contribution to the regional earnings growth is a mere 0.1 percentage points, reflecting a significant gap when compared to the technology-oriented economies of North Asia. Jefferies suggests that this disparity can be traced back to the differing market structures. Korea and Taiwan are home to major players in technology hardware and memory chips, such as Samsung Electronics and SK Hynix, which are at the forefront of AI expenditure. India's market, on the other hand, is more heavily weighted towards sectors like banking, financial services, and industrials, which, while supporting domestic growth, are less directly tied to the booming semiconductor-based AI infrastructure. Earnings expectations further highlight this divide. Jefferies' analysis over three months indicated a 1.1% decline in earnings revisions for India, signaling weaker analyst optimism. In contrast, Korea experienced a remarkable 95% increase in earnings revisions, driven by heightened expectations surrounding memory demand and investments in AI infrastructure. This trend is not limited to Asia. Jefferies estimates that AI-centric stocks may account for nearly 80% of the S&P 500's returns by 2026, with the AI sector witnessing a 30% surge this year alone. Despite this impressive growth, Jefferies maintains that AI stocks are still attractively valued, labeling them as the most affordable sector based on price-to-earnings-to-growth ratios. However, Jefferies cautions investors against focusing solely on AI. Rising U.S. inflation, which hit 3.8% year-on-year in April—the highest since May 2023—raises concerns about potential increases in bond yields and broader market repercussions. Furthermore, geopolitical tensions involving Iran and ongoing negotiations between the U.S. and China pose additional uncertainties. In summary, Jefferies underscores that while the AI race is favoring semiconductor-rich markets, India currently finds itself on the sidelines, observing the unfolding rally without reaping significant benefits.