It’s not surprising that foreign institutional investors (FIIs) are pulling out of India. So, where is their money going?
The short answer is: besides China, it’s going to South Korea, Japan, and Indonesia. These three countries have attracted over $18.5 billion in foreign investments in 2024, according to data from Dezerv as of October 21.
From October 1 to 17, FIIs sold Indian stocks worth a net total of $8.48 billion, according to the National Securities Depository Ltd. At the beginning of October, the focus was mainly on China. When China announced new stimulus measures, foreign investors quickly shifted their money towards Chinese stocks, moving away from India and Japan. Rupen Rajguru, head of equity investment at Julius Baer India, noted that in the second week of October, emerging markets saw inflows of about $40 billion, with a staggering $39 billion going into China.
During this same period, Indian stocks saw an outflow of around $3.5 billion, while Japan faced a record outflow of $9 billion. However, the drop in the value of the yen has prompted foreign investors to buy more Japanese stocks.
Why the Shift?
Interestingly, not just China, but South Korea and Indonesia have also attracted foreign investments, showing a wider change in investor interest in Asian markets. Taiwan’s TSEC Weighted Index has increased by 30% this year, followed by Hong Kong’s Hang Seng with a 22% rise. Japan’s Nikkei 225 is up 14%, and India’s Nifty 50 has increased by 13%. China’s Shanghai Composite has gained 12%, while Indonesia’s Jakarta Stock Exchange saw a 7% return. South Korea’s Kospi, however, is down by 2%.
Experts believe that the FII outflow from India is likely temporary. They think it’s due to two reasons: investors taking profits after a strong market rise and finding better investment opportunities elsewhere. Despite this, India’s long-term growth potential still makes it an attractive place for investments.
Vaibhav Porwal from Dezerv explained that potential returns depend on timing. When stock prices are high, the chances for profits decrease. Currently, Indian stocks are trading at higher price-to-earnings (P/E) ratios (24.2x) compared to markets like Indonesia (18.6x), Taiwan (23.7x), and South Korea (13.4x).
Southeast Asian countries, such as Indonesia and Vietnam, are also drawing attention because of their strong economies and lower stock prices. Vipul Bhowar from Waterfield Advisors pointed out that strong foreign investments in Indonesia and South Korea are due to better valuations and strengths in specific sectors like technology.
Souvik Saha, an investment strategist at DSP Asset Managers, mentioned that the MSCI India Index has fallen about 6% from its peak, marking one of the largest selloffs in India’s history. Large-cap stocks have seen the biggest drops.
Concerns for India
What’s concerning investors in India is the potential slowdown in earnings and the risk of an economic downturn. September’s goods and services tax (GST) collections fell to a four-month low of ₹1.73 trillion, and India’s manufacturing activity also dropped to its lowest in eight months.
This situation makes other global markets look more attractive due to their growth potential and lower valuations. A Goldman Sachs report dated October 18 found that 11 out of 18 Indian companies that reported earnings missed expectations, which is happening across various sectors.
Another reason for the outflow is that foreign investors are rebalancing their portfolios. As the year ends, FIIs often review their investments to align with their strategies and risk levels, selling off high-performing assets to maintain a balanced allocation.
Pankaj Singh, founder of SmartWealth.ai, noted that global investors are shifting towards emerging markets that are becoming strong alternatives to both India and China. He emphasized that most FIIs focus on potential returns rather than just stock valuations when making investment decisions.
If one market offers better returns, that’s where FIIs are likely to invest.
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