ISLAMABAD – Global investors are scaling back their exposure to Indian stocks, as high valuations, weak corporate earnings and a lack of a strong artificial intelligence investment theme weigh on the market, Bloomberg reported.
Singapore-based multifamily office Reed Capital Partners exited its entire Indian portfolio about a month ago. Its Chief Investment Officer Gerald Gan said the investment case for India had weakened as the country’s growth outlook lost momentum.
The retreat is becoming more visible across international portfolios. Foreign portfolio ownership of companies listed on the National Stock Exchange of India has fallen to a 17-year low. India has also emerged as the least favoured market in Asia in a recent Bank of America investor survey.
Janus Henderson Investors and Vantage Point Asset Management have also reduced their exposure to Indian equities to zero over the past year or so.
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Investors turn towards Asian technology markets
The shift represents a reversal for a market that was previously one of the world’s most popular investment destinations.
India attracted international capital on the back of strong economic growth, infrastructure development and its large consumer market. Investors are now finding more attractive opportunities in technology-focused markets such as South Korea and Taiwan, particularly because of growing investment linked to artificial intelligence.
Indian equities are trading at around 17.6 times forward earnings. Although that level is slightly below the market’s historical average, Indian stocks remain considerably more expensive than their emerging-market peers.
The Nifty 50 is trading at a valuation premium of about 77 per cent over MSCI’s emerging-market benchmark.
Foreign investors withdraw $25bn
Foreign investors have withdrawn about $25bn from Indian stocks on a net basis this year, redirecting capital towards other markets.
The Nifty 50 has returned close to its mid-2024 levels and is on course to end a decade-long run of annual gains.
Higher oil prices and a weaker Indian rupee have added to concerns. India relies heavily on imported oil, increasing pressure on its current account when global energy prices rise.
The weaker rupee has also reduced dollar returns for overseas investors. At the same time, currency depreciation has raised concerns about the ability of Indian companies to protect their profit margins.
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Local investors support Indian market
Domestic institutions have helped limit the impact of foreign selling. According to BSE data, local institutions have made net purchases of about $60bn in Indian equities this year.
Some small-cap stocks have also performed better, particularly companies expected to benefit from India’s expanding data-centre industry.
However, foreign investors are becoming more selective. They are seeking stronger evidence of job creation, manufacturing expansion and higher foreign direct investment before increasing their allocations to India.
Analysts remain optimistic
Despite the growing caution among international investors, some analysts continue to expect India’s economy and stock market to recover.
Morgan Stanley expects India to enter a multi-quarter growth upcycle. The investment bank has forecast that the BSE Sensex could reach 89,000 by June next year under its base-case scenario.
India’s weighting in the MSCI Emerging Markets Index, however, has fallen to about 11 per cent, compared with 16 per cent a year earlier.
Investors say the decline reflects India’s weaker performance compared with technology-focused Asian markets. It could also create additional selling pressure from funds that closely track emerging-market benchmarks.
For now, India remains an important emerging market, but the latest capital flows suggest that global investors are demanding stronger earnings, more attractive valuations and clearer growth opportunities before returning in force.
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Key points:
- Global investors are reducing their exposure to Indian stocks amid high valuations and weak corporate earnings.
- Some fund managers have cut their Indian allocations to zero over the past year.
- Foreign portfolio ownership of companies listed on India’s National Stock Exchange has fallen to a 17-year low.
- Foreign funds have withdrawn about $25 billion from Indian stocks on a net basis this year.
- Investors are increasingly favouring artificial intelligence and technology opportunities in South Korea and Taiwan.
- India’s Nifty 50 is trading at a significant premium to other emerging markets.
- Local institutions have provided support by buying about $60bn in Indian equities this year.
- Some analysts remain positive about India’s longer-term growth prospects despite the foreign selling.
