India has dropped from Asia’s most favored to least preferred stock market in 3 months due to tariffs, weak earnings, and foreign outflows, despite strong domestic buying.
India’s stock market has seen a sharp shift in investor sentiment, falling from the top spot to the least preferred among Asian markets in just three months. This reversal comes amid escalating tariff tensions with the United States, following President Trump’s announcement of a 50% levy on goods from India as a penalty for its energy imports from Russia.
In the latest regional market outlook, global fund managers significantly reduced their exposure to Indian equities. Around 30% now hold an underweight position in India, compared to a minority stance just months ago. By contrast, Japan and China have moved up as more favored investment destinations, reflecting a reallocation of regional equity flows.
The change marks a notable contrast to the beginning of the quarter, when India’s $5.2 trillion equity market was considered a relative safe haven during the early phase of US tariff policy shifts. The sharp downturn in sentiment highlights the growing weight of geopolitical risk in shaping investor allocations.
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Market analysts point to three core factors driving this shift: elevated valuations in Indian equities, tepid earnings growth compared to regional peers, and a surge in foreign portfolio outflows — totaling approximately $4 billion this quarter. This outflow has coincided with India’s longest weekly losing streak since the early months of the Covid-19 pandemic.
Interestingly, while foreign investors have been pulling back, domestic institutional investors and retail traders have stepped in aggressively. Equity-focused mutual funds recorded a record inflow of $4.9 billion in July, underscoring the resilience of domestic investment appetite despite global headwinds.
However, the near-term outlook remains cautious. The widening performance gap between Indian and Chinese equities — with Chinese shares outperforming by roughly eight percentage points in July — signals that regional competitiveness is becoming a key consideration for portfolio managers. Unless earnings growth accelerates or trade tensions ease, India may struggle to regain its position as Asia’s favored equity market in the short term.
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