India’s relative underperformance this year, even as emerging markets (EMs) have surged nearly 26%, is increasingly raising questions among investors. Market participants point to a combination of global uncertainties, elevated oil prices, and weak foreign institutional investor (FII) flows, factors that continue to weigh on sentiment despite India’s strong macroeconomic backdrop.
Emerging markets expert Geoff Dennis said, “My head is spinning on all the different views… We get these continuous conflicting headlines. One day it looks good, the next day it doesn’t.” Referring to the ongoing US-Iran tensions, he noted that there is little clarity on how the situation will evolve, adding, “Until there’s a real sign of a proper ceasefire… we are going to continue to be in this sort of limbo.” This geopolitical overhang has kept global investors cautious, particularly toward oil-sensitive markets like India.
Created with AI. Errors are possibleAt the same time, global capital has been flowing elsewhere within Asia. Markets like Korea and Taiwan, driven by strong technology exposure, have seen disproportionate inflows. “Virtually all the money in Asia has gone towards Korea and Taiwan for obvious reasons, given their tech exposure,” Dennis noted. In contrast, India’s relatively limited presence in global tech supply chains has made it less attractive in the current cycle dominated by AI and semiconductor-driven themes.
The result has been persistently weak foreign flows into Indian equities. “There is just no foreign interest in the market right now. FII flows have been negative, they’re poor,” Dennis said . This comes even as India’s domestic fundamentals remain intact, with steady growth and improving corporate balance sheets.
Dennis noted that India’s underperformance has been somewhat surprising. “I assumed that once China deteriorated… India would get some of that money and that hasn’t been the case,” he said. While China’s slowdown was expected to divert flows toward India, the shift has instead favored other Asian markets with stronger exposure to global tech trends.
Valuations across global markets are also adding to investor caution. “Markets are very, very expensive… We’ve got Korea in a clear bubble of sorts, Taiwan in something of a bubble as well,” Dennis observed. He also flagged the possibility that US interest rates may not ease further this year, which could tighten global liquidity conditions and weigh on risk assets.
Despite the near-term headwinds, the longer-term view on India remains constructive. “I would much rather be in India than China or even Korea and Taiwan on a 12-month basis,” Dennis said, suggesting that the structural story remains intact. However, he stressed that timing a turnaround in flows is difficult. “We need a trigger… and that’s going to have to come from foreign investors,” he added.
A sustained easing in oil prices could act as one such trigger. “On the assumption we get some sort of settlement, eventually oil prices will drift a little bit lower. That will help India,” Dennis noted. He also pointed out that a weaker US dollar could support emerging markets like India, especially by stabilising currencies and improving capital inflows.
For now, however, uncertainty continues to dominate. “Timing that is just so hard… you’ve got to time what’s going on with the US, AI cycle, and the Iran situation,” Dennis said. Summing up the current environment, he remarked, “Nothing is happening to fundamentally resolve this… and the risk of war beginning again is still there, and that’s handicapping India in the short term.”
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
