India’s stock market losing shine?

INDIA’S stock market may face a tougher road ahead as global investors become increasingly reluctant to back a market that once stood out for its strong economic growth and long-term structural story.

With foreign money flowing towards artificial intelligence (AI) winners in South Korea and Taiwan instead, India’s equities could struggle to regain their previous appeal unless earnings improve, manufacturing and foreign direct investment (FDI) pick up, and concerns over oil and the rupee ease.

According to a Bloomberg report, the shift in sentiment is already becoming clear: Reed Capital Partners, a Singapore-based multifamily office, decided about a month ago to completely exit its Indian equity portfolio when it wanted to reduce its overall equity exposure.

For its chief investment officer Gerald Gan, the decision was relatively straightforward.

“There isn’t much going on for a good India story,” Gan tells Bloomberg. “It is more the growth story that is withering away for India.”

His view reflects a broader change in how some global money managers see Indian equities.

Once among the world’s hottest investment destinations, India is now being questioned over lukewarm corporate earnings and the lack of a meaningful AI investment theme.

Foreign portfolio ownership of companies listed on the National Stock Exchange of India Ltd has fallen to a 17-year low, while India ranked as the least- favoured market in Asia in a recent Bank of America investor survey, according to Bloomberg.

Janus Henderson Investors and Vantage Point Asset Management are among fund managers that have reduced their India exposure to zero over roughly the past year.

Valuations matter

The contrast with North Asia is particularly stark.

India’s rapid economic growth and Prime Minister Narendra Modi’s infrastructure push were major attractions for investors a few years ago.

But those strengths now look less compelling alongside the returns generated by AI-related companies in South Korea and Taiwan.

Valuations are another hurdle. Indian equities trade at about 17.6 times forward earnings, slightly below their historical average, but remain considerably more expensive than emerging-market peers.

The Nifty 50 Index carries a 77% valuation premium to MSCI Inc’s emerging-market benchmark.

That premium has become harder for global investors to justify as India underperforms markets benefitting directly from the AI boom.

Foreign funds have consequently pulled about US$25bil from Indian equities on a net basis this year, according to the Bloomberg report.

Oily issues

For investors already increasing their exposure to AI-heavy markets, India is also becoming less of a market they fear missing out on.

“Many wealth managers have taken India back to underweight or completely out as they are more concerned about covering the increased weighting of tech plays in Taiwan and South Korea,” Gary Dugan, chief executive of Dubai-based Global CIO Office, tells Bloomberg.

“They don’t see the same kind of risk of missing out in India given the headwind of a high oil price and weak currency.”

About 30% of Global CIO Office’s clients, including family offices and wealth managers, have exited India entirely, Dugan is quoted as saying.

Oil is an especially uncomfortable issue for India because of its reliance on imports.

The vulnerability of Indian assets to oil-price swings became more apparent following the outbreak of the US-Iran war, with the stock market falling while the rupee slid to a record low.

The rupee remains among Asia’s weakest-performing currencies this year despite India raising US$127bil from its diaspora to strengthen its currency defences.

That matters for overseas investors because a weaker currency can reduce their returns even when local assets perform reasonably well.

“The result has been pressure on the current account balance and a weaker rupee.

“Currency depreciation can compound foreign investors’ concerns as it erodes dollar returns, tightens local financial conditions at the margin, and raises questions about the durability of corporate margins,” Carlos Casanova, senior economist for Asia at Union Bancaire Privee, tells Bloomberg.

India’s shrinking weight in emerging-market benchmarks could add another layer of pressure. According to Bloomberg data, India now accounts for about 11% of the MSCI Emerging Markets Index, down from 16% a year ago.

That creates a potentially self-reinforcing problem: weaker performance reduces India’s index weighting, which can give benchmark-conscious investors even less reason to hold the market.

“India’s relative underperformance reduces its index weight, which then gives benchmark-conscious managers less reason to own it, adding to the selling pressure,” Dugan says.

“But it is also an indicator of the times. The dominant theme in emerging markets at the moment is tech, and that is where the money is going.”

Domestic support

Still, the market is not being abandoned by everyone. Domestic institutions have provided an important floor, making about US$60bil in net stock purchases this year, according to BSE Ltd data.

That local buying has helped small-cap stocks emerge as a bright spot, particularly companies benefitting from India’s data-centre build-out.

Morgan Stanley is also more optimistic, arguing that India is in the middle of a multi-quarter growth upcycle.

It expects market performance to improve in the months ahead, with the BSE Sensex Index reaching 89,000 by June next year in its base case, representing a 19% rise, and 100,000 in a bull-case scenario.

But investors are becoming more selective about the India story.

Even the National Stock Exchange of India, long seen as a symbol of the country’s financialisation boom, had to reduce the size of its long-awaited initial public offering last week after investors pushed back against its valuation.

The bigger question for India is, therefore, whether its long-term economic promise can once again translate into returns that justify its premium.

“Modi came in. He did some positive things that were done very well and within a reasonable timeframe, such as goods and services tax harmonisation, the real estate reform, the bankruptcy court, but that hasn’t solved the real issue,” Sat Duhra, a portfolio manager at Janus Henderson Investors, highlights to Bloomberg.

“The issue is jobs, it’s trying to build manufacturing, trying to gain the FDI.”

For now, that leaves India caught between a strong domestic investor base and a more sceptical global one.

Its next phase may depend on whether economic growth can translate into stronger corporate earnings and manufacturing investment – while giving foreign investors a reason to look beyond the AI boom elsewhere in Asia.