Indian markets biggest beneficiary of foreign funds exodus from China; trend may reverse once China recovers

Indian markets have emerged as one of the largest recipients of foreign liquidity globally, attracting inflows amounting to $15.75 billion in the calendar year 2024 to date. Alongside India, the United States and Japan have also been major beneficiaries of foreign liquidity in both 2023 and 2024. Conversely, the largest outflows in 2024 have been observed from China, Brazil, Taiwan, Mexico, Vietnam, and Indonesia.

India’s allocation in Global Emerging Markets (GEM) funds reached almost 20% as of June-end from a low of 8.5% in March 2020. Around the same time, China’s allocation has dropped from a high of 40% to 23%, a report from Elara Capital showed.

Currently, India’s allocation in GEM funds is just marginally below China’s allocation, a trend seen for the first time since 2006.

Inflows continued across global markets, but pace slowed last week to $8.9 billion after inflows of $70 billion in the prior two weeks. US Smallcap flows are showing strong recovery over the past four weeks with a total inflow of $15 billion into smallcap funds during the period, the strongest momentum since December 2020, the brokerage report said.

Emerging Market Flows

Emerging Market inflows also remain strong at $4.5 billion but slowed down from $11 billion in the previous week. Most strength in EM flows is due to strong inflows by domestic investors in China.

However, on the contrary, foreigners are using this liquidity to dump stock aggressively, with last week’s outflow of $2.1 billion being the largest since March 2020 (during peak COVID panic). Since March 2023, foreign funds have pulled out $29 billion from China and deployed $27 billion into India, according to the report.

“India continues to be the biggest beneficiary of China’s weakness, and the shift has accelerated post-election results. This trend can reverse once we see recovery in the Chinese economy,” said the Elara Capital report.

Meanwhile, foreign funds have also been selling from Taiwan and Korea since May 2024. Initial break of momentum visible in Japan flows with last week’s redemptions of $656 million being largest in CY24.

According to the report, the incremental foreign allocations are only visible in the US and India.

Where is liquidity flowing?

Among Emerging Markets sector funds, IT continues to see strong inflows over the past six weeks. Financial flows showed some recovery a few weeks back but not sustaining, and redemptions have again resumed. Consumer Good funds had seen good recovery in month of June and July, but trends are consolidating there since the past 2 weeks, according to the report.

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