India lags EM rally as foreign outflows persist; junk bonds flash early risk-off signals: Elara Capital

The report added that flows in high-yield (junk) bond funds is beginning to show early signs of caution. High-yield NAVs have climbed back to October 2021 highs, the level from which the last major global equity sell-off began.

India continues to diverge from the broader emerging-market recovery trends even as global equity flows remain resilient, according to Elara Capital's Global Liquidity report. Despite the Nifty and Sensex returning to earlier highs, foreign investor sentiment toward India remains subdued.

India recorded a modest net inflow of $148 million, entirely due to GEM fund (Global Emerging Market) allocations, while India-dedicated funds posted their 11th consecutive week of redemptions, with outflows of $208 million compared with $230 million in the prior week. The report noted that selling pressure continues to come predominantly from Luxembourg-domiciled funds, which have recorded $1 billion of cumulative outflows over the past 10 weeks, and from Japan-domiciled funds, which have now seen 18 consecutive weeks of redemptions amounting to $1.1 billion.

On the other hand, GEM funds ( Global Emerging Funds) saw a notable improvement this week, registering $3.1 billion of inflows, the strongest in two months. Within emerging markets, flows were particularly strong into China, Taiwan where inflows hit a six-month high. South Korea, and Brazil recorded its largest inflow since May 2017. This surge in EM inflows (excluding India), the report notes comes at a time when EM equity indices are retesting historic peaks last seen in February 2021 and October 2007, both of which were periods when markets failed to break out. Elara Securities describes the current setup as a critical inflection zone as investors position for a potential breakout.

Global equity fund flows remained strong for the tenth straight week. Foreign investors pulled $3.3 billion out of U.S. equities, mainly from U.K. and Luxembourg-domiciled funds, which was the largest 15-week outflow, but this was more than offset by $15 billion of buying from US domestic funds, keeping overall flows positive. Inflows from Japan into US equities also continued.

The report added that flows in high-yield (junk) bond funds is beginning to show early signs of caution. High-yield NAVs have climbed back to October 2021 highs, the level from which the last major global equity sell-off began. After $53 billion of inflows that followed the Trump tariff event, the segment is now experiencing six weeks of continuous outflows totalling $9 billion, indicating early signs of risk aversion.

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