The appeal of India to global fund managers is diminishing due to modest corporate earnings and the lack of a significant artificial intelligence investment theme, leading to foreign ownership in NSE-listed companies falling to a 17-year low.
When the multi-family office Reed Capital Partners planned to reduce its equity positions about a month ago, it decided to completely exit its portfolio from India. For Gerald Gan, chief investment officer of the Singaporean firm, this was a simple decision. He noted: 'Little is happening for a good Indian story. India's growth story is fading.'
Gan's view reflects growing skepticism among some global capital managers. They point to the absence of an AI investment theme and moderate corporate results as reasons either to reduce their investments or completely leave the $5.1 trillion market.
As a result, the share of foreign portfolio ownership in companies listed on the National Stock Exchange of India Ltd. has dropped to its lowest level in 17 years. This retreat represents a sharp turn for a market that was recently considered one of the most attractive investment destinations globally. According to a recent Bank of America investor survey, India now ranks last among the least attractive markets in Asia.
Fund managers from Janus Henderson Investors and Vantage Point Asset Management reported that they have reduced their exposure to India to zero over the past year. Although India's economic growth rates are among the highest in the world and infrastructure development under Prime Minister Narendra Modi were key magnets just a few years ago, these promises are overshadowed by the profits generated from AI-related projects in South Korea and Taiwan.
Indian stocks trade at approximately 17.6 times forward earnings, slightly below the historical average, but they remain significantly more expensive than comparable emerging market stocks. The NSE Nifty 50 index still carries a valuation premium of 77 percent compared to the MSCI Inc. emerging market benchmark, prompting foreign funds to pull out about $25 billion this year and redirect it elsewhere.
This has caused the Nifty 50 index to remain at mid-2024 levels and be on track to break a decade-long streak of annual growth—a streak surpassed only by Japan's Nikkei 225 in the 1980s among major global stock markets.
Gary Duggan, Global Executive Director of Global CIO Office based in Dubai, stated that many asset managers have moved India into the undervalued category or completely excluded it from their portfolios because they are more concerned with the increasing share of technology companies in Taiwan and South Korea. He added that they do not see the same risk of missing out in India, given the resistance from high oil prices and weak currency.
Duggan reported that about 30 percent of Global CIO Office clients, including family offices and asset managers, have completely exited India. Nevertheless, domestic institutions have supported the market by making net purchases of shares worth about $60 billion this year, according to BSE Ltd. These purchases have helped small companies in the country shine, supported by companies benefiting from data center construction in India.
Morgan Stanley believes that India is in the middle of a multi-quarter growth cycle, and market performance should improve in the coming months if valuations remain favorable. The brokerage firm forecasts a 19 percent rise in the BSE Sensex index to 89,000 by June next year in the base case and reaching 100,000 in a strong growth scenario.
However, investors are becoming more selective. NSE—the symbol of India's financial boom—was forced to scale back its long-awaited initial public offering this week after investors opposed the current valuations.
Main Issue
After more than 12 years of Modi's rule, he is struggling to transform India's status as the fastest-growing major economy in the world into an attractive market for foreigners. The old structural optimistic scenario of a large consumer and service market is now being challenged by the lack of a significant AI direction and high dependence on oil imports.
More than ever, India needs external capital, especially more resilient foreign direct investment, which could support Modi's manufacturing ambitions and serve as a buffer against volatile portfolio flows. Fund managers now believe that the leader needs to do more to attract back foreign investors.
Sat Dhura, portfolio manager at Janus Henderson Investors, stated: 'Modi has come. He has done some positive things that were done very well and in a reasonable timeframe, such as GST harmonization, real estate reform, bankruptcy court, but this has not solved the main problem. The problem is jobs, building manufacturing, striving for FDI.'
The vulnerability of Indian assets to oil price fluctuations became evident with the start of the war between the US and Iran. Alongside the stock market decline, the rupee fell to a record low and continues to rank among the worst performers in Asia this year, despite India attracting $127 billion from its diaspora to strengthen currency reserves.
Carlos Casanova, Senior Economist for Asia at Union Bancaire Privee, noted: 'The result has been pressure on the current account and a weakening of the rupee. Currency devaluation can heighten foreign investor concerns as it reduces dollar earnings, tightens local financial conditions on the periphery, and calls into question the sustainability of corporate profits.'
The situation is complicated by India's declining influence in emerging market indices, driven by its poor performance compared to AI-focused North Asian markets. According to data collected by Bloomberg, the South Asian country now accounts for about 11 percent of the MSCI Emerging Markets index, down from 16 percent a year earlier.
Duggan concluded: 'The decrease in India's relative returns reduces its weight in the index, which in turn gives less weight to less weighted managers, increasing selling pressure. But this is also a sign of the times. The dominant theme in emerging markets right now is technology, and that is where the money is going.'