Indian Stocks Become Biggest Underweight in Emerging Market Portfolios

1 min read     Updated on 21 Aug 2025, 12:55 PM
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Anirudha BasakBy ScanX News Team
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Overview

Indian stocks have become the most underweighted market for emerging market investors, with 71% of EM funds holding underweight positions by July's end, up from 60% in June. Investors are reallocating funds to Taiwan, Hong Kong/China, and South Korea. Factors contributing to this shift include potential U.S. tariffs, slowing earnings growth, and rich valuations of Indian stocks. Foreign investors have net sold $12.70 billion worth of Indian stocks this year. The MSCI India Index has underperformed the broader EM benchmark by nearly 15 percentage points in dollar terms, marking the worst relative performance since 2011. A Nomura study of 45 funds showed 41 had lower allocations to India, with relative allocations decreasing by 1 percentage point in July.

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*this image is generated using AI for illustrative purposes only.

In a significant shift in emerging market investment trends, Indian stocks have become the most underweighted market for emerging market (EM) investors. This development marks a notable change in sentiment towards one of Asia's largest economies.

Underweight Positions Surge

According to recent data, 71% of EM funds held underweight positions in Indian stocks by the end of July, up from 60% in June. This increase represents a substantial reallocation of funds away from India, with investors redirecting their capital to other Asian markets.

Fund Reallocation

Investors have been moving their funds from India to other Asian markets, primarily:

  • Taiwan
  • Hong Kong/China
  • South Korea

This reallocation occurred throughout July, indicating a growing preference for these markets over Indian equities.

Challenges Facing Indian Markets

The shift in investor sentiment can be attributed to several factors:

  1. U.S. Tariffs: India faces potential tariffs from the United States due to its continued purchases of Russian oil.
  2. Slowing Earnings Growth: Indian companies are experiencing a deceleration in earnings growth.
  3. Rich Valuations: Indian stocks are perceived as overvalued compared to other emerging markets.

Foreign Investment Outflows

The impact of this sentiment shift is evident in the significant outflows from Indian equities. Foreign investors have net sold $12.70 billion worth of Indian stocks this year, underscoring the magnitude of the shift.

Underperformance of Indian Stocks

The MSCI India Index has underperformed the broader EM benchmark by nearly 15.00 percentage points in dollar terms. This marks the worst relative performance for Indian stocks since 2011, highlighting the severity of the current trend.

Fund Allocations

A study by Nomura, analyzing 45 funds, revealed:

  • 41 out of 45 funds reported lower allocations to India
  • Relative allocations to India decreased by 1.00 percentage point in July

This data further confirms the widespread nature of the underweight positions in Indian equities among EM funds.

The current underweighting of Indian stocks in EM portfolios represents a significant shift in investor sentiment. As global economic conditions evolve and various factors influencing emerging markets continue to change, it remains to be seen how long this trend will persist and what implications it may have for India's stock market in the coming months.

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