Despite a wave of record equity outflows from India’s stock market in October, global investors are continuing to find attractive opportunities in the country’s sectors, with industrials, healthcare, and telecommunications showing promising growth potential. According to data from the National Securities Depository Ltd., foreign investors have allocated around $3 billion each to these sectors by mid-November, even as the overall withdrawals from Indian equities exceeded $2 billion during the same period.
This divergence in sectoral performance highlights a shifting investment landscape, with global funds increasingly concentrating on areas poised for strong growth while pulling back from sectors such as banks, consumer goods, and energy. These industries have struggled in 2024 as earnings growth has slowed and the broader market has faced pressure from an uptick in share supply, dampening investor enthusiasm.
Ritesh Jain, founder of Pinetree Macro Pvt., a global asset management firm, pointed out that overseas investors are now realising that their portfolios may be overly concentrated in “yesterday’s winners.” He added that the government’s shift towards investment-driven growth, rather than consumption-driven growth, is a key factor shaping market trends. Prime Minister Narendra Modi’s focus on boosting manufacturing has created an optimistic outlook for infrastructure companies, while telecom firms are benefiting from an easing of intense competition, which has allowed for price increases.
Notably, the software export sector has attracted the most foreign investment in the first half of November. The resurgence in this sector is partly attributed to the anticipation that a potential victory for former U.S. President Donald Trump in the upcoming elections could lead to tax cuts, which may spur demand for IT services. A benchmark tracking the performance of software export stocks has risen over 6% in November, defying the broader market downturn.
Conversely, the financial sector, which has historically dominated foreign investors’ portfolios, has faced substantial outflows this year. With over $8 billion withdrawn amid concerns about narrowing margins and asset quality, financial stocks have been hit hard. Similarly, consumption-related stocks are struggling due to sluggish demand in urban areas, while energy shares are under pressure, driven by weak refining margins.
Nitin Chanduka, an analyst at Bloomberg Intelligence, noted that the financial sector accounts for nearly 30% of the $850 billion foreign investors hold in Indian assets. He added that the sector’s large weight means that the outflows from financial stocks are likely to overshadow inflows into other sectors, distorting the overall investment picture.
The challenges facing the financial sector have contributed to the recent correction in the Indian stock market, with the benchmark NSE Nifty 50 Index falling more than 10% from its peak in September. During this period, some lenders and automakers were among the worst-performing stocks on the index, while tech companies such as Tech Mahindra Ltd. and Wipro Ltd. were standout gainers, demonstrating the sectoral shift underway.
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“Banking has been over-owned and IT stocks are under-owned — we are seeing a sectoral churn play out now, and it’s likely to continue,” said Manish Jain, director of institutional business at Mirae Asset Capital Markets Pvt. The shift in investment focus is a direct response to the ongoing cyclical slowdown in India, with global funds reassessing which sectors will remain resilient.
Jain also pointed out that investors are keeping a close eye on how global factors, such as U.S. trade policies under Trump, will impact India’s economy. As the market navigates through uncertain global conditions, foreign investors are adjusting their strategies to capture emerging opportunities while mitigating risk in more vulnerable sectors.
In conclusion, while overall equity outflows from India’s stock market have been significant, investors remain keen on specific sectors with robust growth prospects. The shift in sectoral focus, particularly towards industrials, healthcare, and telecoms, signals a strategic recalibration by global funds in response to evolving market dynamics. As India’s economy continues to grow and diversify, these sectors appear to be at the forefront of a new wave of foreign investment.
