Emerging Market Funds Underweight On India, Says Citi

After meeting more than 30 investors in the US, Citi Research noted one major thing in common. Most of the emerging-market funds are underweight on Indian markets, which is in sharp contrast to its meeting conclusion last year, when everyone preferred India. It's the biggest underweight position by the EM funds, according to the New York-headquartered investment bank.

However, EM funds' most bearish view on Indian equities in 20 years does indicate a starting point for position, as growth starts to recover, Citi Research said.

This bearish view came a week after Citi Research upgraded India to overweight. As of now, a lot of questions rose regarding this view. The investment bank figured the key risks to Indian equities is a prolonged recovery, uncertainty in global markets weighing on external demand and private capex recovery. Risk-off sentiment in the global set up weighing on domestic flows is also among them, Citi Research said.

Domestic flows into Indian capital markets remained resilient at a time when foreign fund outflows amounted to $25 billion since October 2024, the brokerage said. Domestic institutional investors invested $36 billion during the same period. What'll be the flow outlook in near future is hard to predict, Citi Research said. The investment banker will be watchful of the trends.

Citi Research's constructive view is based on GDP and earnings recovery. The slowdown in Indian markets is cyclical and a gradual recovery is underway, according to the brokerage. Among reasons for this is a pick-up in government capex in December 2024 and January 2025. Personal tax incentives announced in the union budget, and the RBI taking liquidity measures, and normalising risk-weight on banks' NBFC and MFI credit are also reasons. The central bank also reduced the repo rate in its February meeting, Citi noted.

Earnings growth will likely be a good catalyst for any investors who are waiting to be exposed to India. Financials, insurance, healthcare, and telecom are Citi's preferred segments.

The brokerage is cautious on Indian IT sector. Recovery pace will not be smooth after guidance from Capegemini, EPAM System Inc., and Globant, it said.

The NSE Nifty IT's 7% year-to-date fall shocked most traders. The index declined despite Rupee depreciation and defensive perception about IT sector, Citi Research said.