(The views expressed here are those of the author, the founder and CEO of Emmer Capital Partners Ltd.)

Foreign institutions have been selling Asian equities hand over fist since late fall, when the probability of a second Donald Trump administration began to increase, but resilient domestic flows in India have helped its equity market mitigate the pain. But will this resilience last?

STABLE DOMESTIC FLOWS

Since October 2024, foreign institutions have sold around $39.5 billion of Asian equities, with India representing about half of that. But the Indian market has been relatively resilient, with the BSE Sensex down only 10% from its late September peak.

This is largely thanks to big domestic inflows from retail investors and domestic institutions. Flows from the latter have skyrocketed since the pandemic days of mid-2021, driven by a jump in investments through Systematic Investment Plans (SIPs), that is, regular monthly investments of predetermined amounts into domestic mutual funds.

Average monthly SIP inflows reached $2.7 billion in 2024, with around $3 billion in each of the three months through January. That represented roughly half the total average monthly flows from all domestic institutions.

INDIAN EXCEPTIONALISM

Such resilient domestic flows are uncommon in Asian equities. Korea, which has a large local investor base, has seen consistent selling by domestic institutions over the past five years.

Malaysia, which also has significant domestic equity participation, has not been able to attract enough domestic purchases in the past five years to offset the fierce selling among financial institutions.

HISTORICAL UNDERINVESTMENT

Many factors are propelling this shift among Indian investors, the principal ones being historical under-investment in the asset class and the imperative to outpace inflation.

Go back a decade, and an average Indian household had under 2.0% of its gross financial savings in equities, as data from the Reserve Bank of India shows. This proportion went up temporarily in late 2016, due to policy changes, only to decline again to 3.3% by fiscal 2021.

But Indian households are now investing 7-8% of their savings in equities following the recent surge.

Still, Indians’ equity holdings are significantly lower than their Asian peers on a percentage basis, with equities representing roughly 20% of the portfolios of Korean householders and China’s top tier city dwellers.

In short, Indian households still have a lot of room to increase their equity investments.

At the same time, investing in equities has been made operationally easier for the average Indian with the rapid opening of new bank accounts and the rollout of inexpensive, easy-to-use trading platforms.

From fiscal 2020 to 2024, the total number of dematerialized accounts – i.e., accounts used to hold listed securities in India – shot up from 40 million to more than 150 million.

BEATING INFLATION

Indians have also been raising their equity holdings recently in an attempt to outpace inflation. The consumer price index in India increased from 2% in late 2019 to 7-8% by 2022-23. In the previous five years, CPI ranged from 2-5%.

Real estate and bank deposits used to be the assets of choice for Indians seeking to maintain their purchasing power.

But real estate, the darling of affluent Indians historically, has underperformed equities consistently over the past eight years.

And investors can no longer rely on earning reliably high yields in the Indian bond market. While the Indian 10-year bond offered a 10-15% yield in the 1990s and early 2000s, that fell to 5-8% over the past 6 years.

True, India’s yield gap – the earnings yield (the reciprocal of the price-to-earnings multiple) less the benchmark bond yield – has been negative for the past decade and significantly lower than the long-term average.

In theory, this should make equities less attractive. But exuberance for growth currently appears to be overshadowing any valuation concerns.

DANGER AHEAD?

But this resilience may now be tested. The domestic Indian retail investor, who has grown accustomed to superlative equity returns, may be balking at the 10% drop in the Nifty 50, an Indian equity index, over the five months through January.

And despite these recent declines, valuations in the Indian equity market remain high. Moreover, some large Indian asset managers have indicated that there are few attractive investment opportunities left in this market.

The Reserve Bank of India could come to the rescue with rate cuts and liquidity infusions, as it appears to have room to ease policy. But inflation, growth and interest rate dynamics in the U.S. may restrict the RBI’s options moving forward.

Ultimately, the recent market weakness could be a test of whether the shift toward equities among Indian investors is merely a short-term phenomenon or a true paradigm shift.

(Manishi Raychaudhuri is the founder and CEO of Emmer Capital Partners Ltd and former head of Asia-Pacific equity research at BNP Paribas Securities).

(Writing by Manishi Raychaudhuri; Editing by Anna Szymanski and Bernadette Baum)