Global Investors Exit India as Stock Market Loses its Shine

Global investors are pulling back from Indian stocks, with fund managers cutting their exposure to near-zero levels due to high valuations, weak corporate earnings and the absence of a strong artificial intelligence investment theme, according to Bloomberg. Reed Capital Partners, a Singapore-based fund, recently divested its entire Indian portfolio.

Chief Investment Officer Gerald Gan cited a weakened growth story for India. Foreign ownership of National Stock Exchange of India-listed companies has plummeted to a 17-year low, and the country has become the least favored market in Asia, according to a Bank of America survey. Janus Henderson Investors and Vantage Point Asset Management have also cut ties with India over the past year.

This shift is a reversal for a market that once attracted the world's most capital. India's economic growth, infrastructure development, and large consumer market once drew global funds, but investors are now favoring technology opportunities in South Korea and Taiwan. Indian equities are trading at 17.6 times forward earnings, slightly below their historical average but still more expensive than emerging market counterparts.

The Nifty 50 Index is trading at a 77% premium over MSCI's emerging market benchmark. Foreign funds withdrew $25 billion from Indian stocks this year, shifting capital to other markets. The Nifty 50 is nearing its mid-2024 level and on track to end a decade-long growth streak. Concerns include high oil prices, a weaker rupee, and India's dependence on oil imports, which strain the current account.

Local institutions have supported the market, making net stock purchases of $60 billion this year, according to BSE data. Small-cap stocks have outperformed in certain sectors, particularly those benefiting from the expanding data center industry. Morgan Stanley predicts a multi-quarter growth upcycle for India, with the BSE Sensex potentially reaching 89,000 by June next year.

However, foreign investors are becoming more selective, demanding stronger evidence of job creation, manufacturing growth and foreign direct investment. India's share of the MSCI Emerging Markets Index has dropped to about 11% from 16% a year earlier. Analysts attribute this decline to weaker performance compared to technology-focused markets, which may encourage further selling by funds tracking emerging market benchmarks.