Indian stocks sell off, A shares become new emerging markets

Foreign investor enthusiasm for Indian equities has cooled markedly recently, particularly in October, when overseas funds recorded the largest monthly net selling on record. At the same time, capital allocation in emerging markets is undergoing a profound rotational shift. Industry observers point out that as China has introduced a series of new policies aimed at stimulating economic growth, some of the funds that were active in the Indian market have begun to reduce their allocation to the market and instead look to the more attractive Chinese market.

In detail, figures released by the National Securities Depository of India Limited reveal the severity of the change. Foreign investors pulled more than $10 billion from Indian stocks in October, the largest monthly outflow since March 2020 and the largest monthly net selling observed by the agency since it began keeping public data in 2002. The figures certainly cast a shadow over the outlook for the Indian stock market. Adding to the turmoil, India's currency, the rupee, has fallen to near record lows against the dollar.

Another set of data, released on November 2nd by EPFR, a global fund flow monitor, further confirms the persistence of this trend. Indian equity funds saw outflows for the second week in a row in the week to October 30, the data showed, marking the first time since the end of the first quarter of 2023 that the market has seen back-to-back weekly outflows. In fact, as early as October 2-9, Indian equity funds had already seen their first outflows of the year, a change that interrupted a streak of record inflows that began at the end of the first quarter of 2023 and marked the largest weekly outflow since the second quarter of 2022.

Heading into November, there has been no respite from the sell-off. Preliminary data released by the National Securities Depository Corporation of India showed net selling of Indian stocks by overseas investors reached 43.298 billion rupees on November 4 alone. The figures once again highlight the loss of confidence foreign investors have in Indian equities and their eagerness to leave the market.

Under the weight of foreign selling, India's two main stock indices - the Nifty 50 and the Sensex 30 - both suffered their biggest monthly falls in October since March 2020. Among them, the Nifty 50 index fell 6.22 percent in October, while the Sensex 30 index fell 5.83 percent. These numbers are no doubt a wake-up call for investors in the Indian stock market, reminding them that the market is experiencing an unprecedented challenge.

In the face of this grim situation, Goldman Sachs and other internationally renowned financial institutions have also adjusted their ratings and forecasts for the Indian stock market. In its latest research note, Goldman Sachs downgraded the Indian stock market from overweight to neutral, noting that the overall valuation of the Indian stock market has reached 24 times forward earnings, which is already at a historical peak. Goldman Sachs believes the Indian market is likely to experience more volatility in the next three to six months as a cyclical slowdown weighs on corporate earnings.

But even as India's stock market suffers a chill, another emerging market force - the Chinese stock market - is attracting increasing attention. An earlier survey by Bank of America showed that global fund managers are cutting allocations to India and putting more money into the Chinese market after the country launched a series of new policies aimed at stimulating economic growth. This change shows that investors are flexibly adjusting their investment strategies and asset allocation according to changes in market conditions.

Goldman Sachs 'Global Fund Flows report confirms this trend. The report shows that in the four weeks ended Oct. 30, global capital inflows into equities totaled $63.628 billion. Among them, the US stock market received a net inflow of 37.228 billion US dollars, while the Chinese stock market received a net inflow of 24.385 billion US dollars. While Chinese equity funds experienced some profit-taking in mid-to-late October, outflows were only a third of the more than $40 billion that flowed into them in the first week of October. EPFR said investors' confidence in the Chinese market has not been greatly affected by expectations of more growth-stabilizing incremental policies in early November.

HSBC also reported that global emerging market funds are now overweight in China's domestic market for the first time in 10 months, while Asian fund holdings in China have hit a five-year high. These data undoubtedly provide strong support for the future development of China's stock market.

From the high-frequency data, the effect of China's recent package of incremental policies has gradually emerged. The business conditions of the manufacturing and service industries are improving, and the momentum of economic growth is gradually recovering. China's manufacturing PMI came in at 50.1% in October, up 0.3 percentage points from September and back above the line between growth and contraction, according to data released by the National Bureau of Statistics. The figures suggest that overall conditions in China's manufacturing sector are improving, with both new orders and export orders rising and output prices showing signs of a sharp rebound, suggesting firmer demand.

Foreign enthusiasm for Indian equities is clearly cooling, while allocations in emerging markets are rebalancing towards Chinese equities. In the face of this change, investors need to remain calm and rational, and flexibly adjust their investment strategies and asset allocation according to changes in the market situation. At the same time, the Chinese government also needs to continue to introduce more effective policy measures to stimulate economic growth, boost market confidence and attract more foreign investment inflows.