Mumbai: A significant shift is occurring in the emerging markets investment landscape as Foreign Institutional Investors (FIIs) increasingly turn away from Indian stocks in favor of more attractive options like Taiwan, South Korea, and Brazil. A recent Nomura report highlights that Indian equities have become the biggest underweight for EM investors, with many reallocating their assets elsewhere amid growing concerns over valuation and earnings growth in India.
Declining Interest in Indian Stocks
In the ever-evolving world of finance, a new trend is becoming apparent: India, once the darling of foreign investors, is losing its shine. According to a recent report by Nomura, a major shift in investment focus has occurred, with Emerging Market (EM) funds increasingly viewing Indian stocks as less appealing. In July, 71% of these funds were underweight on India, a significant increase from 60% at the end of June. Investors have been reallocating their capital to markets like Taiwan, Hong Kong/China, and South Korea, suggesting a growing trend away from Indian equities.
This shift is reflected in a survey conducted by Bank of America (BoFA), which revealed that India has rapidly transitioned from being the favorite Asian investment to the least favored within just three months. This stark change in sentiment can be attributed to multiple factors impacting the Indian economy and its stock market.
Reasons Behind the Withdrawal of FIIs
The reasons driving this withdrawal are multifold, with one prominent factor being a slowdown in earnings. Elara Capital pointed out that India’s year-on-year USD Earnings Per Share (EPS) growth for the June quarter was a mere 4%, placing it among the weaker performers globally. While Indian stocks continue to trade at elevated valuations—with the Nifty 50 index priced at 19.4 times its two-year forward Price-to-Earnings (P/E) ratio—other emerging markets such as Taiwan, South Korea, and Brazil offer more attractive investments at lower valuations.
Furthermore, as per consensus estimates, India’s projected EPS growth rate for the period from CY24–26 is just 9%, lagging behind MSCI EM’s expected 14%. Compounding these concerns, analysts observed a downward revision of 1.8% in FY26 earnings estimates for India over the past three months, contrasting with a 3.7% upgrade for China.
Trade Policy Impacts and Valuation Concerns
Another influential factor affecting FIIs’ sentiment toward India is the imposition of high tariffs by the United States. With tariffs on Indian goods soaring to 50%, investor confidence is wavering, as noted by Ross Maxwell, Global Strategy Lead at VT Markets. In the context of ongoing geopolitical tensions and a challenging trade environment, these tariffs contribute to a defensive stance among global investors regarding Indian equities.
Alongside tariffs, the valuation of Indian stocks has also raised eyebrows. While the Nifty 50 and Sensex indices have recorded substantial gains in recent years, this success has led to inflated prices compared to their regional counterparts. Maxwell further emphasized that emerging markets such as South Korea, Taiwan, Brazil, and Indonesia are becoming increasingly appealing due to lower valuations and sector-specific opportunities that India currently lacks.
Profit-Taking as a Strategy
Profit-taking is another strategy influencing the decision for many FIIs. After enjoying strong returns from the Indian stock market, investors are reallocating their funds into underperforming or more favorably valued markets with better potential for near-term upside. “With FIIs having enjoyed strong gains in India, they are now focusing on markets that appear undervalued,” Maxwell noted.
Future Outlook: Can the Shift Be Reversed?
While FIIs have been selling off Indian stocks, analysts suggest that this trend might not signify a loss of confidence in India’s robust fundamentals, but rather a strategic reallocation. “Despite this outflow, it is important to note that India remains a structurally strong, long-term investment destination thanks to its demographic, digital transformation, and macroeconomic resilience,” said Maxwell.
For a turnaround to occur and to reignite FIIs’ interest in India, Rajini Vislavath, Chief Investment Officer at Alternatives-LGT Wealth India, emphasized the need for stable policy frameworks, improved corporate governance, enhanced earnings growth, and the easing of regulatory hurdles. “These adjustments will be critical for attracting foreign investments back to India in the medium to long term,” she added. With fundamental strengths such as digital innovation and a youthful demographic, experts remain hopeful that Indian equities will eventually reclaim their luster in the eyes of foreign investors.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
Bankerpedia’s Insight💡
The recent shift of Foreign Institutional Investors (FIIs) away from Indian stocks underscores a distressing trend for India’s banking and finance sector. As countries like Taiwan and South Korea attract more investment due to favorable valuations and earnings growth, India risks becoming less competitive in the global market. This could lead to reduced capital inflow and stagnant growth for local businesses. For investors, maintaining a diversified portfolio and staying vigilant about global market dynamics will be essential to navigate these turbulent waters effectively. Sustained reforms and improvements in corporate governance are crucial for restoring investor confidence.
What Does This Mean for Me?🤔
- Salaried Person → Potential job stability concerns due to declining investments.
- Business Owner → Diminished foreign investment appeal affects growth prospects significantly.
- Student → Reduced foreign investments may impact job opportunities for students.
- Self-employed → Lower investment appeal may reduce self-employment opportunities.
- Homemaker → Reduced investment options may impact household financial stability.
- Retiree / Senior Citizen → Lower returns from Indian stocks may affect retirement savings.
- Job Seeker → Reduced foreign investment may limit job opportunities in India.
- Farmer / Rural Citizen → Investors shifting focus may reduce availability of funds.
Research References📚
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