India: short-term noise versus long-term opportunities

It has been more than a decade since the MSCI India index has recorded a negative year, but it has been a difficult start to 2026 for the Indian stock market. It has faced two significant headwinds, neither of its own making: an energy crisis coming from the war in Iran, and the perception that it is the “anti-AI” trade.

The closure of the Strait of Hormuz has highlighted the country’s structural sensitivity to energy prices and its reliance on imported oil. India usually takes around half of its imported oil from Gulf producers through the Strait and while the government has done a good job of finding alternative sources, there are inevitable threats to economic growth should the conflict persist.

The second problem for Indian markets has been that investors have shown little interest in non-AI sources of growth. Taiwan, Korea and to a lesser extent, China, have been the favoured countries in the region because they are plugged into the AI build-out. The combination of these two factors has prompted a period of currency weakness and lacklustre equity market sentiment, with foreign investors reducing exposure. 

Structural growth drivers

While these are important considerations, it is worth distinguishing between cyclical pressures and the underlying structural trajectory of the economy. The fundamental drivers of India’s long-term growth story remain intact – economic reform, a young and dynamic working population, infrastructure development, and domestic consumption. Equally, the current crisis needs to be put in perspective. To date, the Reserve Bank of India has only revised growth down by around 0.3% to 6.7%. Certainly, there are risks ahead, but for the time being, they are theoretical rather than real.

In a market such as India, these periods of dislocation can create opportunities to buy into quality companies at lower valuations. The problem for us on the Aberdeen New India Investment Trust is seldom a lack of attractive companies, but instead, it is buying them at a price that is attractive. This is easier today than it has been at any point over the past 12 months.

Against this backdrop, the fund is not positioned around a single macro view or near-term market forecast. We are aware of the risks and remain firmly focused on themes where the growth trajectory is well established, and not likely to be disrupted by the war in Iran, or short-term swings in sentiment.

Long-term growth trends

The financialisation of the Indian economy is one example. The long-term shift from physical savings such as gold and real estate towards formal financial instruments including bank deposits, credit, insurance, mutual funds, and equities is still in its early stages.

Demat account penetration (‘Demats’ are digital accounts that holds financial securities such as stocks, bonds, and mutual funds) is around 13% in India. This is up from around 2% over the past decade, but in the US, it is over 60%. Mortgages, insurance, and other financial products also have a long pathway of growth ahead. In the portfolio, we capture this trend through high-quality financial franchises such as ICICI Bank and HDFC Bank, while Bajaj Finance provides more targeted exposure to the expansion of consumer credit. 

Equally, while India does not have a lot of domestic AI companies, its digital economy is scaling rapidly. The government has prioritised digital infrastructure, and smartphone adoption is rapid. Nokia’s Mobile Broadband Index reported average monthly mobile data consumption per user at around 27.5 GB in 2024, rising to over 31 GB in 2025.

This growth in consumption is supporting a multi-layered investment opportunity: connectivity enables digital activity; digital activity drives demand for computing and storage; and that demand requires substantial physical infrastructure. Bharti Airtel sits at the centre of this theme. It is also investing in data centres. India’s digital public infrastructure is also expanding, and digital payments have quickly become the norm for consumers and merchants, reducing friction, improving transparency, and enabling a wider range of digital services to scale. In the portfolio, PB Fintech, India's largest online comparison platform for insurance and lending products is a clear beneficiary.

While India doesn’t have any of the behemoth AI companies seen in the US, Korea, or Taiwan, it is still building data centres in preparation for AI adoption. Companies such as Siemens are benefiting from the electrification, automation and power management needs that data centres require, while rising demand for cables and wiring should help companies such as KEI Industries.

The energy crisis has been a useful reminder to Indian policymakers that the energy transition is important for long-term growth. The impact of the energy crisis for China, for example, has been diminished thanks to its investment in alternative power sources. We hold the Power Grid Corporation of India, which is critical to building and operating the transmission backbone required to integrate intermittent renewables into the national grid.

Shifting consumption

A final important growth area is consumption. As India’s economy grows and household incomes rise, spending patterns are shifting from essentials towards higher-value goods and experiences. With GDP per capita at around US$2,800 (compared with over $14,870 for China), India is still in the foothills of its economic expansion. With the New India portfolio, automotive manufacturer Mahindra & Mahindra and retail conglomerate Trent are part of this theme. Titan gives us exposure to the premiumisation and formalisation of jewellery retail, while Indian Hotels captures the shift towards experiences as households allocate more income towards domestic travel.

We find a world of opportunity within these growth areas, without ever having to look at cyclical areas that are vulnerable to the ebb and flow of short-term economic performance. More importantly, we can buy into their long-term growth at lower prices than we’ve seen in some time.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

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