(Bloomberg) -- Foreign investors are souring on India’s stock market, selling a record amount of shares amid signs the South Asian nation’s post-pandemic economic boom is losing steam.
Global funds pulled out more than $10 billion on a net basis in October, helping drive the benchmark stock index toward a so-called technical correction. Sustained foreign investor outflows could act as a drag on near-term stock performance, according to Citigroup Inc.
The past few years have seen India emerge as a preferred investment destination, thanks to its breakneck economic growth, surging corporate profits and a broader shift away from China. But some of that shine is now starting to fade as equity valuations have become among the priciest in the world, the pace of expansion in the economy and earnings is slowing and Chinese stocks are staging a comeback following a stimulus blitz since late September.
“While the selling by foreign investors may not remain as severe, they will stay on the cautious side,” said Rajat Agarwal, an Asia equity strategist at Societe Generale SA. Agarwal, who tactically turned neutral on Indian equities in late 2023, said both earnings growth and valuations have “more room to moderate.”
Consumers in Indian cities are cutting back on spending, with firms making everything from soaps to cars warning of a decline in urban middle-class demand due to inflation and poor job prospects. While rural consumers are showing signs of spending more thanks to a good monsoon season that boosted farm incomes, that can’t make up for the pullback among nearly 500 million city dwellers.
Goldman Sachs Group Inc. also tactically turned neutral on Indian equities from overweight last month, citing slowing economic growth and high valuations. Some economists project the economy to grow at less than 7% this fiscal year, down from more than 8% in the prior year.
As foreign outflows picked up pace, the benchmark NSE Nifty 50 Index lost 6.2% in October, its worst monthly performance since March 2020. The fiscal 2025 earnings estimate for the gauge’s components has seen a 2.2% cut during the ongoing reporting season, according to Jefferies Financial Group Inc.
Still, the Nifty is up more than 10% in 2024, on track for an unprecedented ninth straight year of gains. Share purchases worth more than $50 billion by the nation’s domestic institutions this year have helped prevent a deeper market selloff.
“Domestic liquidity can continue to support India’s stock market,” said Joanne Goh, senior investment strategist at Singapore-based DBS Bank. “We still think that earnings can grow at about 15% and the Sensex index can still reach another high.”
Even after the recent slump, the NSE Nifty 50 Index’s valuation remains the priciest in emerging Asia. The gauge is trading at more than 21 times its 12-month forward earnings, versus a five-year average multiple of 19.4 times.
Global investors tend to invest in certain sectors within India, “and I think some of those have some stretched valuations,” Brian Kersmanc, a portfolio manager at GQG Partners, said on Bloomberg Television last week.
Strategists at Bernstein Societe Generale Group expect some more weakness in Indian stocks heading into the year-end.
“The market hasn’t yet fully priced in the extent of the slowdown that could be on the cards,” Venugopal Garre and Nikhil Arela wrote in a note. “Once reality hits, we expect a further but limited moderation in Nifty from current levels to ~23,500 — which remains our year-end target.”
The gauge fell 1.3% on Monday, the most in a month, to finish at 23,995.35.
--With assistance from Haslinda Amin and John Cheng.
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