Foreign funds will be compelled to invest in Indian equities; Jefferies’ Chris Wood explains why

Chris Wood said India is ranked 8th in the Bloomberg World Index with a weight of 2 percent indicating scope for increasing investment for foreign investors

Foreign investors are soon likely to be compelled to buy Indian companies' stocks because of under ownership among global investors despite a recent rise in market weight, said Christopher Wood, Global Head of Equity Strategy. In a Jefferies note, Chris Wood explained Indian equities’ strong earnings growth profile and track record of generating peer-beating returns. He said that rising Indian market weight and deep markets should attract incremental foreign flows to the country.

Under-ownership of Indian equities among foreign investors

Despite being the 5th largest stock market in terms of market capitalisation, India is ranked 8th in the Bloomberg World Index with a weight of 2 percent. This provides scope for foreign investors to increase investment into the fastest-growing country in the world, said Wood.

According to him, Indian equities are the most under-owned by global emerging markets active funds since 2014. He adds that while India’s weight in the MSCI EM index has increased, foreign investors have not shored up Indian equities in the same proportion. This will change moving forward, he said.

India’s weightage in emerging market indices has increased since 2020. Jefferies points out that India’s weightage in the MSCI EM index has increased to 17.9 percent now from 8 percent in June 2020. Wood said the increasing weightage of India in a global fund will make Indian stocks ‘a must have’ for a more diverse set of equity investors beyond the EM-focused ones.

The note also mentioned that Indian markets witnessed $20 billion in equity flows in 2023, which wasn’t as high compared to previous levels as a percentage of market cap, indicating potential for more inflows.

Underpentration of domestic funds in Indian markets

Wood also noted that Indian markets are underpenetrated by domestic funds compared to global standards. According to data compiled by the World Bank, only 5 percent of Indian household savings are in equities. Mutual fund assets-to-GDP is at 16 percent, which is lower compared to the global average of MF assets to GDP at 60 percent. With more and more investors now becoming aware of mutual funds, Jefferies expects more savings to flow into Indian equity markets.