Global investors have been pulling money out of India’s stock market at an unprecedented rate, redirecting funds towards Chinese equities in a significant shift in investment trends.
Over the past six months, foreign investors have withdrawn nearly $29 billion from Indian equities, marking the highest outflow recorded in any similar period.
The exit comes after India’s stock market surged to record highs in September 2024.
The Nifty 50 index has experienced a 13% decline since then.
Meanwhile, Chinese markets have attracted investors, driven by renewed optimism about government stimulus policies and the promise of growth in the artificial intelligence sector.
Hong Kong’s Hang Seng Index has surged 36% since late September, drawing in capital that was previously flowing into India.
Asset managers, including Morgan Stanley and Fidelity International, have been scaling back their exposure to Indian equities and reallocating funds to Chinese investments.
Economic conditions trigger a selloff
India’s stock market had been riding high on strong corporate earnings and economic growth, but slowing performance in key sectors has impacted investor sentiment.
Rising inflation and high interest rates have weighed on company profits, with Nifty 50 firms recording only a 5% earnings growth in the December quarter—marking the third consecutive quarter of single-digit expansion.
Prior to this slowdown, companies had enjoyed two years of double-digit profit increases, making the market particularly sensitive to any signs of weakness.
As a result, India’s stock market, previously considered an attractive destination for foreign investments, has seen a sharp correction.
Valuations had been exceptionally high, with global investors rushing to take advantage of the country’s growth potential.
However, concerns about a slower economic outlook have triggered a selloff, wiping out over $1 trillion in market value since September.
China attracts new inflows
While investors reduce their exposure to Indian markets, China has been regaining favor due to its aggressive economic stimulus efforts and recovering market sentiment.
Beijing has introduced a series of policy measures aimed at stabilizing its economy, including incentives to support technology companies and increased investment in artificial intelligence research.
A significant driver of this shift has been the success of Chinese startup DeepSeek, which has fuelled optimism in AI-related stocks.
With the Hang Seng Index rebounding strongly, institutional investors are increasingly viewing China as a more attractive option, particularly given the relative affordability of Chinese stocks compared to Indian equities.
For the first time in two years, China now holds a larger weight than India in Aubrey Capital Management’s portfolio, a shift that reflects broader market sentiment.
Asset managers are locking in profits from India’s stock market boom and reallocating capital to China and other emerging markets in Southeast Asia.
Can Indian stocks bounce back?
Despite the recent selloff, some investment firms remain optimistic about India’s long-term prospects.
While companies such as Morgan Stanley and Fidelity International have trimmed their positions, they still maintain an overweight stance on Indian equities.
Some analysts believe that the market correction presents an opportunity for long-term investors to re-enter at lower valuations.
However, further downside risks remain. If India’s economic growth continues to slow or corporate earnings remain weak, additional outflows could occur.
On the other hand, if inflation stabilises and interest rates ease, investor confidence may return, potentially reversing the outflow trend seen in recent months.
For now, global investors are closely watching economic indicators in both India and China to determine where their capital will flow next.
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