With investors shifting their focus to China, the momentum of flows into India-focused offshore funds has taken a sharp hit this month. Besides, weak domestic earnings growth also led global investors to rethink their short-term fund deployment strategy.
The average weekly inflows into these funds in October have been $138 million, less than half of the $300 million per week seen in the previous two months, according to data from Elara Capital.
“The momentum of flows into India-dedicated funds (flow as a % of free float market cap) has slowed down for the first time since 2022. This is after a crowded round of inflows since January 2023,” said Sunil Jain, vice-president at Elara Capital, adding that earlier, there were limited options for these investors, which led to continued inflows into India despite high valuations.
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However, over the last few weeks, China has become an attractive proposition for many global investors on the back of stimulus measures announced by the government and relatively cheaper valuations compared to other emerging markets, particularly India.
“Until a couple of months ago, no one wanted to be in China. It was a no-go area. Now, if it’s going to improve, people have to be there. It’s too big a market not to be in and (risk) underperforming. Therefore, while you’ve made good money in India, you don’t want to miss out on China,” said Andrew Holland, CEO, Avendus Capital Alternative.
Over the last two years, India-dedicated funds saw robust flows amid strong domestic macroeconomic fundamentals and corporate earnings growth. However, the earnings performance in the first quarter of FY25 and the latest numbers for September quarter have been disappointing.
“India versus China remains the single most important question facing emerging market investors, and it is becoming harder to make this choice,” Macquarie said in a note last week, highlighting the increase in interest towards China.
Macquarie highlighted concerns with regard to weakening GDP growth in India and slowing corporate earnings growth. A combination of these factors has resulted in loss of comfort that investors had with Indian markets at rich valuations, experts said.
Jain, who heads alternative and quantitative research at Elara Capital, believes the best period in terms of flows into India-dedicated funds could be over.
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