Over the past six months, international investors have been offloading Indian equities at an unprecedented rate, redirecting funds toward Chinese markets in a stark shift of fortunes between the two Asian powerhouses.
A combination of high inflation and elevated interest rates has eroded corporate earnings, leading to a 13% decline in Indian stock values since their record peak in September, wiping out $1 trillion in market capitalization. Meanwhile, China's commitment to pro-growth policies is attracting fresh capital inflows.
"When China sees inflows, India does not," remarked Jitania Kandhari, Deputy CIO at Morgan Stanley Investment Management.
Since October, foreign investors have withdrawn nearly $29 billion from Indian stocks—the largest outflow in any six-month period—abandoning a market that had been a global favorite in recent years. Much of that capital has shifted to China, where the Hang Seng Index has surged 36% since late September, fueled by optimism around artificial intelligence, particularly following breakthroughs from Chinese startup DeepSeek.
For the first time in two years, China's weighting has surpassed India's in the portfolio of Aubrey Capital Management, which specializes in consumer-focused investments. Portfolio manager Rob Brewis noted that gains from Indian equities in previous years are now being rotated into China, Southeast Asia, and other markets.
Although firms like Morgan Stanley and Fidelity International remain bullish on India, they have been gradually paring their exposure to increase allocations to China. Fidelity’s Nitin Mathur stated that while India remains attractive, the firm has become more cautious and trimmed its holdings slightly.
China’s stock market, paradoxically, has emerged as a safe haven amid geopolitical tensions, presenting a bargain for investors who view it as poised for economic recovery.
Before the recent downturn, India’s stocks were riding high on relentless demand, pushing valuations to extreme levels. However, a slowdown in corporate earnings and projections of the weakest economic growth in four years have dampened investor sentiment.
Earnings for Nifty 50 companies grew by just 5% in the December quarter, marking a third consecutive quarter of single-digit expansion following two years of robust double-digit growth. The Indian market was "priced for perfection," noted Anwiti Bahuguna, CIO of Global Asset Allocation at Northern Trust, adding that even minor earnings disappointments triggered a selloff.
Despite the correction, India's Sensex still trades at a premium valuation of 20 times projected earnings, compared to a far more modest 7 times for the Hang Seng Index, according to LSEG data.
"There’s still room for capital outflows from India," said Sammy Suzuki, Head of Emerging Markets Equities at AllianceBernstein, pointing to the challenge of justifying high valuations amid weakening earnings.
However, not all investors are turning their backs on India. Ryan Dimas of William Blair’s Global Equity Strategies believes that India remains one of the strongest economic stories globally, supported by multiple growth drivers and a resilient stock market.
Yet, according to Morgan Stanley’s Kandhari, foreign capital is unlikely to return to Indian equities in a significant way until at least the second half of 2025.