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Nicholas Spiro

In July 2024, India’s weight in the MSCI Emerging Markets Index, a leading gauge of stocks in developing economies, hit a record high of 19.99 per cent. At the time, this was less than three percentage points below China’s weight, which at one point was as high as 43 per cent.
Between 2022 and 2024, India was the darling of emerging market equity investors. The combination of the country’s fast-growing economy, strong corporate earnings, the Covid-19 pandemic-induced boom in retail trading and the dramatic deterioration in sentiment towards China caused investors to pile into Indian shares.
In a report in October 2022, Morgan Stanley said India had “the conditions in place for an economic boom fuelled by offshoring, investment in manufacturing, the energy transition and the country’s advanced digital infrastructure. These drivers will make it the world’s third-largest economy and stock market by the end of the decade”.
Fast forward to today, and the bull case for India is less compelling. At the end of last month, the country’s weight in the index was below 11 per cent, its lowest level since July 2021. Foreign investors’ cumulative net purchases of Indian shares, which hit a record high in 2024, have fallen to their lowest level since 2016.
India’s equity market is no longer in the world’s top five by market capitalisation, having fallen behind Hong Kong, Taiwan and South Korea in recent years. With the exception of Indonesia, it is the least-preferred major stock market in the Asia-Pacific, according to respondents to Bank of America’s latest Asia Fund Manager survey on June 16.
Several factors are at play. US President Donald Trump’s impulsive decision in August last year to raise the tariff rate on imports from India to a punitive 50 per cent dampened the outlook for exports and foreign direct investment. This cast doubt over India’s ambition to become a global manufacturing hub.


Although the rate was lowered to 18 per cent in February, the sharp deterioration in relations between Washington and New Delhi showed India was no longer in a geopolitical sweet spot. China’s weaponisation of rare earth elements, which forced Trump to back down after threatening a massive escalation of tariffs, reinforced perceptions of India’s weaker geopolitical position.
Moreover, the global energy shock exposed India’s heavy dependence on oil and gas imports from the Middle East. The impact “was immediate and severe. The current account deficit widened, the rupee fell sharply and the market priced in the worst,” Barclays said in a report.
While oil prices have fallen in response to progress in talks between the United States and Iran, the shock has cast doubt over the inflation-fighting credibility of the Reserve Bank of India. Despite suffering sharp outflows of capital this year, the bank has so far refused to raise interest rates.
However, the most important reason for the underperformance of Indian stocks is the dramatic change in the emerging market equity landscape in the past year. The boom in artificial intelligence (AI) has benefited technology-driven markets, especially those with a heavy concentration of semiconductor and tech hardware firms.


The surge in demand for memory chips has turbocharged the growth in exports and corporate earnings for South Korea and Taiwan, two leading semiconductor hubs. This has pushed up the weights of the two markets in the MSCI Emerging Markets Index to 23 and 26 per cent respectively, higher than China’s share.
The huge reallocation of capital to markets with direct exposure to the AI buildout has hurt India, which lacks the chip manufacturing and digital infrastructure drivers of the South Korean and Taiwanese markets. In fact, the only tech exposure in India is the country’s large software firms, which are suffering their worst year since 2008 amid the threat posed by AI disruption to a widening range of industries.
Does this mean the India craze among investors is over? Not necessarily. A glance at the performance of Asian stocks shows how volatile and vulnerable the region’s equity markets have become. According to Societe Generale, South Korea alone is expected to account for 75 per cent of the growth in corporate earnings across the region this year.
Moreover, the nation’s retail investors account for a large portion of the buying, with a sharp rise in margin debt tied to the launch last month of single-stock leveraged exchange traded funds tracking SK Hynix and Samsung Electronics, South Korea’s two chip giants. On June 23, the Kospi stock index fell 10 per cent amid excessive speculation by retail investors. “High concentration and leverage are not new, but the tighter interest rate environment is,” Societe Generale said.

Bond markets are pricing in a rise in US interest rates as soon as September, with the steep fall in oil prices adding to upside risks to growth. If the AI trade unravels because of excessive concentration in a handful of tech stocks and a hawkish US central bank, India will start to look more appealing.
India remains a compelling growth story. No other emerging market is comparable in both scale and catch-up potential. The sell-off in stocks has eased concerns about lofty valuations. “The economy that was too expensive a year ago is now available at a meaningful discount while still growing near 7 per cent,” Barclays said.
The AI boom has turned global fund managers away from India. However, many of the arguments supporting the bull case for Indian equities still hold true.


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Investors have flocked to tech-heavy markets, but looming US interest rate rises and volatility fears could see India’s star shine again


Investors have flocked to tech-heavy markets, but looming US interest rate rises and volatility fears could see India’s star shine again.


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Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


Column

Is investors’ love affair with India ending?

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Investors have flocked to tech-heavy markets, but looming US interest rate rises and volatility fears could see India’s star shine again

Investors have flocked to tech-heavy markets, but looming US interest rate rises and volatility fears could see India’s star shine again