Only three months ago, India stood proudly as the most sought-after destination for equity investors across Asia. Its stock market, valued at $5.2 trillion, was seen as a resilient and dynamic player in a volatile global environment. However, a recent survey by Bank of America (BofA) paints a very different picture.
The August poll, covering 99 fund managers who collectively oversee $183 billion in assets, shows that 30% of respondents are now underweight on India — meaning they hold a smaller proportion of Indian equities compared to their benchmarks. This marks the highest underweight rating for any Asian market in the survey. Thailand follows at 20%, and Malaysia at 10%. Meanwhile, Japan has secured the top spot, with China climbing into second place..
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From Market Favourite to Tariff Target
Earlier in May, India overtook Japan as the preferred Asian equity market, buoyed by perceptions of economic stability and an ability to weather early US tariff actions. Investors saw India as a safe harbour during turbulent times.
That optimism shifted sharply after US President Donald Trump announced a doubling of tariffs on Indian goods to 50%. The stated reason was New Delhi’s continued purchase of Russian oil, a move that triggered concerns among foreign investors. The tariff hike coincided with weaker-than-expected corporate earnings and valuations that many considered overstretched, eroding confidence in India’s market appeal.
Withdrawal of Foreign Capital
Foreign investors have pulled approximately $4 billion from Indian equities in the current quarter. In stark contrast, Chinese stocks have outperformed Indian equities by eight percentage points in July — their best relative showing since February — driven by improving economic indicators and a softer US dollar.
This divergence has shifted regional investor sentiment, drawing attention away from India and toward markets that are showing faster momentum and perceived growth potential.
Emerging Markets Back in the Spotlight
BofA’s findings also highlight a broader trend: renewed enthusiasm for emerging markets (EM). A net 37% of fund managers are overweight EM equities, the highest level since February 2023, with nearly half of respondents viewing them as undervalued.
The MSCI Emerging Markets Index has delivered returns of more than 16% in US dollar terms so far this year, outperforming developed market indices, which have returned 11%, and the S&P 500, which has gained 8.6%.
JPMorgan has upgraded EM equities to “overweight,” citing stronger growth forecasts and more attractive valuations, adding further momentum to this trend.
Domestic Investors Counter the Decline
While foreign capital has been retreating, domestic investors have stepped in to absorb the selling pressure. Indian equity mutual funds recorded record net inflows of ₹427 billion ($4.9 billion) in July, with much of the investment driven by retail participants.
Institutional investors within India have also been increasing exposure, suggesting a belief that the current foreign exodus may be temporary and that fundamentals will ultimately support a recovery.
Recovery or Prolonged Weakness?
India’s ability to reclaim its former position as Asia’s preferred equity market will depend on a delicate balance of factors. High valuations remain a hurdle, while geopolitical developments — particularly the US tariff stance — add uncertainty.
If corporate earnings rebound and trade tensions ease, sentiment could shift back in India’s favour. However, if headwinds persist, the market may continue to lag behind its regional peers, and foreign allocations could remain subdued.
For now, investors — both local and international — will be closely monitoring whether India’s current setback proves to be a short-term disruption or the beginning of a longer, more challenging phase in its investment narrative.
