Whalesbook
A majority of large emerging-market funds are currently holding less Indian stock than their benchmark weight suggests, citing high valuations and slower earnings growth. While domestic investors remain confident, foreign fund managers are concerned about the premium pricing of Indian equities compared to other developing nations. This update explores why international sentiment is cooling and what it means for market liquidity.
What Happened
A recent analysis of 70 large emerging-market funds managing approximately $320 billion reveals that international investors are taking a step back from Indian equities. As of March 2026, 61% of these global funds maintained an underweight position on India. Being underweight means these funds are holding a smaller percentage of Indian stocks than what the global index suggests they should. This indicates that international money managers are not as optimistic about the Indian market's immediate prospects compared to other regions, leading to a cautious approach toward increasing their investments here.
The Valuation Premium
One of the primary reasons for this cautious stance is the price of Indian stocks. The Indian market is currently trading at a valuation premium of roughly 70% compared to the broader basket of emerging-market peers. In simple terms, investors are paying significantly more for every rupee of earnings in India than in other developing countries. For many global fund managers, this gap has become difficult to justify, especially because the growth in corporate earnings in India has recently struggled to keep pace with the high price expectations built into the stock prices.
Earnings Growth Concerns
Foreign investors often look for a balance between growth and price. While Indian corporate earnings are expected to show improvement in the coming fiscal years, they are currently trailing behind regional competitors. Several factors are creating pressure on these earnings forecasts. A weaker rupee, which makes imports more expensive, along with elevated oil prices, has increased costs for many companies. Additionally, potential disruptions from monsoon patterns, specifically concerns regarding El Niño, are being closely watched as they could impact rural demand and broader economic stability.
Why Domestic Sentiment Differs
There is a notable divide between foreign and local sentiment. While global funds have reduced their exposure, the Indian market has been strongly supported by domestic institutional investors and retail participants. This internal buying power has acted as a cushion, keeping the market resilient despite foreign caution. Citi Research has pointed out that India’s share in Global Emerging Market funds has hit a five-year low. Furthermore, foreign investors have also flagged India’s limited role in the current global AI infrastructure buildout as a potential reason for their reduced enthusiasm compared to other tech-focused emerging markets.
What Investors Should Track
For investors, the key monitorable is whether Indian companies can deliver earnings growth that matches their current valuations. If earnings recover strongly, the valuation premium may become easier for global investors to accept, potentially triggering a return of foreign inflows. Investors should also watch the macroeconomic factors mentioned, such as currency stability, oil price movements, and agricultural output, as these will heavily influence corporate margins. The balance between domestic buying strength and foreign fund sentiment will likely continue to determine the market's direction in the near term.