India's Underperformance: Why Global Investors Are Shifting Focus

Published in Stocks and Investing on Thursday, August 21st 2025 at 4:57 GMT by Business Today
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For years, India has been touted as a growth engine, attracting significant investment from around the globe. However, recent trends reveal a surprising shift in sentiment amongst international fund managers, with many reducing their exposure to Indian equities and increasingly favoring markets like China and Korea. A new reality is emerging: global investors are significantly underweight on India, and a palpable concern exists regarding its future performance relative to other Asian powerhouses.

The Business Today article highlights that approximately 71% of Emerging Market (EM) funds currently hold an underweight position in Indian stocks. This means they possess fewer Indian shares than their benchmark index dictates. This isn't just a minor adjustment; it represents a substantial reallocation of capital away from what was once considered a cornerstone investment destination. The article points to a growing trend – a shift towards China and Korea, suggesting investors are seeking higher returns and potentially mitigating perceived risks associated with the Indian market.

What’s Driving This Change in Sentiment?

Several factors contribute to this evolving investor perspective. While India continues to boast impressive long-term growth potential, short to medium-term challenges have dampened enthusiasm. The article points to a slowdown in domestic consumption as a key concern. Despite government initiatives aimed at boosting demand, consumer spending hasn't rebounded as strongly as anticipated, impacting the earnings of many listed companies. This sluggishness is particularly noticeable compared to the robust recovery seen in China.

Furthermore, persistent regulatory uncertainties and bureaucratic hurdles continue to plague businesses operating in India. While reforms are underway, their implementation has been slower than expected, creating an environment of unpredictability that discourages some investors. Concerns about corporate governance practices also linger, impacting investor confidence. The article references a recent report highlighting these concerns, further reinforcing the narrative of caution surrounding Indian investments.

Another significant factor is the underperformance of the Nifty 50 index compared to its regional counterparts. While India has historically outperformed, this trend has reversed in recent periods. China’s market recovery, fueled by government stimulus and improved economic data, has been particularly attractive, offering higher returns with perceived manageable risks. Similarly, South Korea's technological prowess and export-oriented economy are drawing investor interest.

The Impact of Global Macroeconomic Conditions

Beyond domestic factors, global macroeconomic conditions also play a crucial role in shaping investment decisions. Rising U.S. interest rates and concerns about a potential recession in developed economies have led investors to reassess their risk appetite. Emerging markets, often seen as higher-risk assets, are particularly vulnerable during periods of economic uncertainty. While India is generally considered less risky than some other EM nations, it hasn't been immune to the broader market sentiment.

China’s Resurgence and Korea’s Appeal

The article specifically emphasizes China’s renewed appeal. Government stimulus packages aimed at revitalizing the economy are showing signs of traction, leading to improved economic data and a corresponding boost in investor confidence. The sheer scale of the Chinese economy and its potential for future growth remain compelling factors for global investors.

South Korea's attractiveness stems from its strong technological base, particularly in semiconductors and electric vehicles – sectors experiencing significant global demand. Its stable political environment and robust export performance further enhance its appeal to international fund managers.

What Does This Mean for India?

The underweight positioning by EM funds isn’t necessarily a death knell for the Indian market. It does, however, serve as a stark warning sign. The government needs to address the concerns raised by investors – improving regulatory clarity, streamlining bureaucratic processes, and strengthening corporate governance practices. Furthermore, policies aimed at stimulating domestic consumption are crucial to reignite economic growth.

The shift towards China and Korea also highlights the importance of remaining competitive on a global scale. India must continue to innovate, attract foreign direct investment, and create an environment conducive to business growth. While long-term potential remains undeniable, regaining investor confidence requires decisive action and demonstrable progress in addressing current challenges. The article suggests that without such improvements, India risks losing out on significant capital inflows as investors prioritize markets offering more immediate returns and a lower risk profile.

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India's Underperformance: Why Global Investors Are Shifting Focus