India market darling no more, trails global emerging market peers

Light FPI positioning seen as bullish sign as HSBC, Goldman turn overweight India

India has become the least favoured market among global emerging-market (GEM) investors. A note from HSBC shows that India is now the biggest underweight in GEM portfolios, with only a quarter of the funds tracked still overweight on the country. This comes as India’s neutral weight in the MSCI Emerging Markets (EM) Index has dropped to a two-year low of 15.25 per cent after a year of steep underperformance. The underweight call means fund managers are allocating less than the benchmark (neutral weight of) 15.25 per cent to India in their EM portfolios. 

Just over a year ago, India was investors’ top pick among EMs. Its slide down the rankings follows $30 billion (over ₹2.5 trillion) of foreign selling over the past 12–13 months. 

However, light foreign investor positioning is seen as a bullish sign, with HSBC and Goldman Sachs turning 'overweight' on India. 

"India’s year to date underperformance of 27 percentage points against EM, largest in two decades, was triggered by a mix of peak starting valuations and cyclical growth slowdown that led us to downgrade our view on India in Oct last year. We now see a case for India to perform better next year, with growth-supportive policies, earnings revival, supportive positioning and defensible valuations," said a note by Goldman Sachs. The US-based brokerage has upgraded the domestic market to 'overweight' has set a Nifty target of 29,000. 

“Foreign funds have pared their India exposure quite meaningfully. A large part of this shift came as investors piled into artificial intelligence (AI) plays in Asia through Korean and Taiwanese tech stocks and Chinese internet names,” said Herald van der Linde, head of equity strategy for Asia-Pacific at HSBC. 

He said the AI trade has become crowded, leaving many investors “uncomfortable”.

 

“We see India as a useful AI hedge and a source of diversification for those uncomfortable with the AI frenzy,” van der Linde added, saying that foreign inflows to India are likely to pick up in the coming months.

 

That trend may already have begun. In October, foreign portfolio investors (FPIs) were net buyers of Indian equities, bringing in ₹11,050 crore.

 

Some market watchers say the shift reflects selling in China.

 

“Indian and Chinese equities are often seen as opposing counterweights. If one moves higher, the other falls. The idea is that foreign investors fund a rally in China by selling Indian equities and vice versa,” said the bank’s chief Asia equity strategist.

 

This time, however, could be different.

 

“We think both India and Mainland China can do well together. The current rally in China is being driven mainly by local investors, with little foreign participation. Chinese households hold large cash reserves and remain underexposed to equities. We expect them to stay active buyers,” he said.