India’s stock market is experiencing a shift in investor sentiment, with a 30 per cent surge in Chinese stocks prompting investors to move money from domestic markets to China. This reversal of fortunes marks a notable change from the past three years, during which China’s losses benefited India. According to Elara Capital, India-dedicated funds have seen their first redemption since March 2023, with $245 million being withdrawn.
In the preceding eight weeks, average inflows were $300 million, but this has slowed to $107 million in the previous week. India-dedicated funds have assets of over $80 billion.
China, on the other hand, is witnessing a sharp revival in foreign flows. China-dedicated funds recorded inflows of $9.3 billion this week, extending the two-week tally to $15.5 billion.
Elara said the recent inflows into China have almost recouped 45 per cent of foreign redemptions from China funds since August 2023.
Between September 2021 and August 2024, China’s Shanghai (SSE) Composite Index had slumped over 30 per cent. However, in the past month, the index has seen a 30 per cent rebound, buoyed by Beijing’s aggressive stimulus measures to revive its economy.
While the exact quantum of funds moving from emerging markets (EMs) into China is difficult to ascertain, Elara believes “Sebi FPI data and INR/USD currency movement suggest that a big portion of flow is moving out from India.”
As per Sebi data, foreign portfolio investors (FPIs) have pulled out $5.7 billion from domestic stocks so far this month. The outflow is the highest among EMs that disclose daily foreign flow data. According to Bloomberg data, FPI outflows from other Asian markets are relatively modest. South Korea has seen a month-to-date outflow of $770 million, while Taiwan and Thailand have recorded less than $500 million each.
The Indian rupee on Friday slipped below 84 per dollar for the first time.
These FPI outflows and rupee weakness come at a time when the risk appetite of overseas investors has been dampened by a flare-up in geopolitical tensions and uncertainty over the trajectory of US rate cuts.
“The ongoing geopolitical challenges have influenced FPIs to shift their focus towards more affordable markets, impacting domestic market liquidity,” said Vinod Nair, head of research, Geojit Financial Services.
After the latest surge, the SSE Composite still trades at 16 times its one-year forward earnings estimate. India’s Nifty 50 index is over 50 per cent pricier at 25 times its one-year forward earnings estimate. The valuation gap must narrow by a further 25 per cent to revert to long-term averages.
“With renewed interest in China equities following recently announced monetary and liquidity measures and market expectations of more fiscal stimulus ahead, we think there is a rising risk of near-term underperformance of India equities against the broader Asia-ex-Japan index,” said Nomura in a note earlier this week. The brokerage said India’s valuation levels, returning to 21 times, “should become an attractive point for investors.”
Elara believes the risk-on rally in China is also a concerning factor for domestic mid- and small-caps.
It said investors have pulled out from India midcap funds for the 14th week, with another outflow of $60 million this week.
First Published: Oct 11 2024 | 4:51 PM IST
