Why Are FIIs Avoiding India? Morgan Stanley's Ridham Desai Lists Three Reasons

The lack of an artificial intelligence trade could be one of the reasons why foreign institutional investors are currently not investing in India, according to Morgan Stanley's Chief Equity Strategist of India, Ridham Desai, who lists out three reasons why the overseas investors are underweight on the south Asian nation.

Desai pointed out how the lack of FII participation in India boils down to three key factors: valuation, AI, and competition.

“One is that they still have problems with India’s absolute valuations, even though relative valuations have improved significantly,” Desai told NDTV Profit. “One year ago, China was at nine times earnings, India was at 20 times. China is now at 15 times, and India is still at 20 times.”

Ridham Desai's statement came at a time when the Indian equity benchmark NSE Nifty 50 traded 5% off their record highs clocked in September 2024. While most global markets have given positive returns, the benchmark Nifty 50 has been largely flat in the past 12 months. Yet, the valuations of Indian stocks remain expensive. The Nifty is trading at 22.23 times its price to earnings, as opposed to China's 17.63 multiple.

The markets in February had entered a correction zone as the Nifty had then dropped 10% from its lifetime highs. Desai feels Indian valuations are quite attractive due to the recent corrections, especially compared to China.

“Relative to China or emerging markets as a whole, India has been the most attractive for the better part of the last 25 years. But absolute valuations are where they were — earnings have not moved, share prices have not moved,” he said.

Ridham Desai believes another key reason why foreign investors have ignored India is because of the lack of AI-related trade or hype in the market.

India has no AI trade. In the past six months, the world has been all about AI trade.

"Markets with a large proportion of AI trade, excluding Europe trade, defence and AI have been driving a lot of markets up 20-40%. That’s why markets are up last 12 months, and that’s why it feels India has been in a bear market," he added.

The final factor, according to Desai, is the strong domestic investor base in India, which is lapping up any buying opportunity and absorbing the selling pressure.

"Foreign investors are up against the domestic bid, which means they need to get share prices a lot higher because domestic investors actually offer stock," he concluded.