Global investors are significantly reducing their exposure to Indian equities, with foreign portfolio ownership of companies listed on the National Stock Exchange of India Ltd. falling to a 17-year low. According to reports from The Hindu BusinessLine, when Reed Capital Partners, a multifamily office, wanted to trim its equity exposure about a month ago, it chose to entirely exit its Indian portfolio. Gerald Gan, chief investment officer at the Singapore-based firm, cited that "there isn't much going on for a good India story" and noted that "it is more the growth story that is withering away for India." The exodus has been driven by the absence of an artificial-intelligence investment theme and lukewarm corporate earnings, as investors seek returns from AI plays in South Korea and Taiwan instead. Money managers at Janus Henderson Investors and Vantage Point Asset Management said the funds have pared India exposure to zero in the past year or so, marking a stark reversal for a market that was once one of the world's hottest investment destinations.
Indian equities trade at about 17.6 times forward earnings, slightly below their historic average but still significantly more expensive than emerging market peers. As reported by The Hindu BusinessLine, the NSE Nifty 50 Index commands a 77% valuation premium to MSCI Inc.'s emerging-market benchmark. This premium has prompted foreign funds to pull about net $25 billion this year, leaving the Nifty 50 Index languishing near its mid-2024 level and on track to snap a decade-long streak of annual gains. The index is now trading at levels bettered only by Japan's Nikkei 225 in the 1980s. According to Global CIO Office Chief Executive Gary Dugan, many wealth managers have taken India back to underweight or completely out positions as they are more concerned about covering increased weighting of tech plays in Taiwan and South Korea.
India now ranks as the least-favored market in Asia according to a recent Bank of America investor survey, as reported by The Hindu BusinessLine. While India's economic growth rate remains among the highest globally, and Prime Minister Narendra Modi's infrastructure build-out were key attractions just a few years ago, that promise pales beside returns from AI plays in South Korean and Taiwanese markets. About 30% of Global CIO Office's clients have exited India entirely, with many wealth managers taking the country back to underweight or completely out positions. Dubai-based Global CIO Office Chief Executive Gary Dugan noted that "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." After more than 12 years in power, Modi has struggled to translate India's status as the world's fastest-growing major economy into an attractive market for foreigners, with the old structural bull case of a large consumer and services market now being challenged by a lack of meaningful AI play and high dependence on oil imports.
Despite foreign fund outflows, local institutions have provided a floor for the market with net stock purchases of about $60 billion this year, according to BSE Ltd. data as reported by The Hindu BusinessLine. This buying has helped small-cap stocks emerge as a bright spot, buoyed by companies benefiting from India's data center build-out. Morgan Stanley sees India in a multi-quarter growth upcycle and expects the BSE Sensex Index to rise 19% to 89,000 by June next year in its base-case scenario, reaching 100,000 in a bull case. However, investors are becoming more discerning, with NSE forced to downsize its IPO after investors pushed back against valuations, highlighting the growing selectivity in India's equity markets. Sat Duhra, a portfolio manager at Janus Henderson Investors, noted that "the issue is jobs, it's trying to build manufacturing, trying to gain the FDI," emphasizing that Modi needs to do more to lure back foreign investors.
India's vulnerability to oil price swings came to the fore with the US-Iran war outbreak, with the rupee slumping to a record low and continuing to rank among Asia's worst performers this year despite India raising $127 billion from its diaspora to bolster currency defenses. As reported by The Hindu BusinessLine, India's share in the MSCI Emerging Markets Index has shrunk to about 11% from 16% a year ago, driven by poor performance versus AI-focused North Asian markets. Carlos Casanova, senior economist for Asia at Union Bancaire Privee, noted that "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." This shrinking clout reduces index weight and gives benchmark-conscious managers less reason to own Indian stocks, adding to selling pressure as the dominant emerging market theme remains tech investments.
