The Indian market has taken a terrible beating in recent times, but a look at chart 1 gives a broader picture. The chart shows the recent sharp falls in the Indian and Indonesian indices and the rise in the Dow and in the Taiwan index.

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But it also shows that, measured from the lows of March 2009, when markets across the world started to recover from the slump, the Sensex and the Jakarta Composite were the best performers. More importantly, they’re still up more than the others, in spite of the recent falls. Given this outperformance, maybe it’s to be expected that investors would take some money off the table.

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The story that led to their doing better than other markets in 2009 was that both India and Indonesia were domestic consumption plays and were relatively insulated from the global economy. Well, at present, the exact opposite story is in play. Funds are moving to the developed world on hopes of seeing the green shoots of a recovery there, while markets that stand to gain more from a global recovery, such as Korea and Taiwan, are also seeing gains.

As fund flow tracker EPFR Global points out, “Outflows from emerging market equity funds were the strongest in three years in the week ending 2 February as investors continued taking last year’s gains and putting them to work in the US, Japan and other developed markets."

Also, as chart 2 shows, in spite of the recent drop, the Indian market continues to rule at a premium, a premium increasingly at risk because the factors that contributed to it, such as its domestic orientation story and its growth differential with other nations, are in jeopardy. A survey by Morgan Stanley last month showed that two-thirds of the participating investors were underweight India—the lowest since June 2009.

Here’s one statistic that highlights the change in outlook: as of 7 February, while foreign institutional investors had sold a net Rs6,015 crore worth of stocks this year, they had bought a net Rs10,709 crore worth of debt instruments.

But apart from the rotation of funds, the outlook for the economy, too, has changed. For instance, the capital goods sector has been badly affected, with year-on-year (y-o-y) growth estimated to slip to 2.6% in the second half of the current fiscal year. Corporate results from the capital goods sector show that growth in order intake has slowed, while high input costs have dented profitability.

The capital goods index on the Bombay Stock Exchange has been mauled badly, doing far worse than the benchmark Sensex this year. What’s worse, a falling market could lead to an even further slowdown in investment demand. This is not just because of a dampening of animal spirits among entrepreneurs, but because sluggish markets will mean companies will increasingly turn to banks. That could increase demand for bank funds, pushing up interest rates even further, increasing the hurdle for capital expenditure.

Here’s another statistic: as Alchemy Share and Stock Brokers Pvt. Ltd have pointed out, all-India cement despatches, in volume terms, fell by 2.9% y-o-y in December and steel consumption was down 3.2% y-o-y. These numbers reinforce the macro data on gross fixed capital formation and suggest that projects are being put off. Recall also that growth in construction is also estimated to be more muted in the second half of the year and the numbers add up to a slowdown in investment demand. The upswing in the business cycle is in danger of being choked off within two years of getting started.

Under these circumstances, the outperformance in chart 1 is cold comfort. All it does is point to that old adage: the higher you go, the harder you fall.

Graphic by Yogesh Kumar/Mint

Manas Chakravarty looks at trends and issues in the financial markets. Comment at