According to a note by Elara Capital, the Indian equity market continues to experience selling pressure for the fifth consecutive month, with the majority of the selling originating from India-dedicated funds.
Elara Capital's February 14 report, "Alternative Opinion on Quantitative and Alternatives," states that redemptions above $405 million were recorded during the week, including $238 million coming from India-focused funds. Dedicated funds are those that are maintained for specific purposes or strategies, which here include mutual funds and ETFs.
However, the redemption triggers are beyond that of US-based funds, even UK-based funds have been steadily pulling out of India since November 2024, leading to a total outflow of $435 million. Other regions where significant selling pressure was observed include Ireland (-$103 million), Luxembourg (-$88 million), and Japan (-$46 million).
According to data from Elara, while the United States invests in India by way of investing through ETFs that are generally passive, low-cost tools, other international fund flows come actively. These outflows add to the phase of a significant correction in the Indian equity market.
Construction and banking investments for India's JPY-denominated exposure are at their lowest in the last decade, while capital goods/utilities have started declining from their peak levels. According to the Elara note, India seems to be on 'euphoric top' with respect to the performance of India-specific funds, reminiscent of 2018, which hint at a probable market correction or at least a pause in the future. However, the note also mentions a temporary potential support level below which Indian equities may collapse even further. It also notes that elevations of flow rates into US markets gradually remit, raising worries of either overheating or possible correction in US equities, thus making funds take more conservative positions.
Fund inflows into Europe and China
Funds inflow into European equities in December 2024 came to $2.5 billion, the highest for any month since January 2023, with an inflow of $930 million for Germany, $824 million for Switzerland, $658 million for France, and $344 million for the Netherlands. The report's interpretation is that investors expect either Europe's growth to catch up with that in the US or stability and less volatility compared to the geo-political upheaval.
There has been an improvement in foreign inflows into China over the past two weeks, with investments reaching $573 million month-to-date, the largest since October 2024. This reflects a shift in global fund managers' strategies, with funds moving from India to China. Additionally, the commodity bet on China has gained momentum, as the EM Commodity/Materials fund saw its largest monthly inflow since August 2023 at $92 million. This marks a steady recovery in commodity fund flows from recent lows.
According to the Elara note, India’s long-standing growth story may be under pressure, as some global investors are pulling their capital out in response to macroeconomic challenges in emerging markets.
