India-dedicated funds log first weekly redemption since March 2023

China's resurgence, expensive valuation dim India appeal; Midcap funds see 14th week of outflows

India's stock markets are 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 is a notable change from the past three years, where 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to Elara Capital, India-dedicated funds have seen their first redemption since March 2023, with $245 million being withdrawn.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, the average inflows were $300 million. It 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 two week’s 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 Composite Index 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.

The exact quantum of funds moving from emerging markets (EMS) into China are difficult to ascertain.

“Sebi FPI data and Rs /$ currency movement suggests that a big portion of flow is moving out from India,” Elara says.

According to Sebi data, FPIs have pulled out $5.7 billion from domestic stocks so far this month. The outflow is highest among EMs, which 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 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 flare up in geopolitical tensions as well as uncertainty over US rate cut trajectory.

“The ongoing geopolitical challenges have influenced FPIs to shift their focus towards the affordable markets, which is impacting the domestic market liquidity,” said Vinod Nair, Head of Research, Geojit Financial Services.

After the latest surge, the SSE Composite still trades at 16x its one-year forward earnings estimate. India’s Nifty 50 index is over 50 per cent pricier at 25x one-year forward earnings estimate. The valuation gap has to narrow 25 per cent to revert to long-term averages.

“With renewed interest in China equities on the back of recently announced monetary and liquidity measures and market expectations of more fiscal stimulus ahead, we think there is a rising risk of some near-term underperformance of India equities against the broader Asia-ex-Japan index,” said Nomura in a note earlier this week.

The brokerage added India’s valuation levels going back 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 smallcaps.

It said investors have pulled out from India midcap funds for the 14th week with another outflow of $60 million this week.