Goldman Sachs: Investors are overweight Indian stocks, underweight China

Markets nervous ahead of Chinese New Year
Markets nervous ahead of Chinese New Year   

Swooning Chinese stock markets have cast a pall on Asian equities this year but how are investors positioned?

According to Goldman Sachs, money managers are still overweight Indian stocks relative to benchmarks, while concerns over capital outflows and worries about market positioning have dented demand for Chinese stocks.

Asian stock markets have suffered hefty outflows since last summer when anxiety over the health of the Chinese economy started to rise.

Year-to-date, Asian equities have seen a cumulative $7.7 billion-worth of foreign selling, with outflows across markets. Foreigners have sold $40 billion worth of emerging market (EM) Asian equities since the start of June, according to Goldman Sachs.

India remains the largest overweight in Asia, although funds have reduced allocations recently. Still, the fact that a large section of the market still thinks Indian stocks will go just one way is a worry.

"With India being a 'consensus long' and a strong overweight within regional/EM funds, investors are worried about potential positioning risks if 'flow pressure' persists, particularly in the light of elevated stock valuations and negative sentiment around EM assets," Goldman says.

According to the investment bank, public sector banks and investment cyclicals are some of the Indian sectors with the strongest ownership levels.

H-shares affected by A-share market turmoil?
H-shares affected by A-share market turmoil?   

What about China, where the Shanghai composite index is already down 20 percent year-to-date?

Aggregate investor positioning in China offshore equities is extremely light. Like the largest underweight position in China relative to benchmarks in a decade light, even after including exposure to Hong Kong, which many funds use as a way to play Chinese stocks.

Chinese financial stocks are particularly unloved.

"Out of our sample of the largest 200 EM funds, around three-fourths of funds are either underweight China banks or don't own them at all, indicating positioning is extremely light on the sector," Goldman says.

The much-ballyhooed inclusionof U.S.-listed Chinese stocks to global benchmarks last year hasn't sent investors flocking to their shares yet, although this should change.

Goldman believes funds will be forced to raise allocations or else the sector will end up as the largest underweight position, particularly as the weight of Chinese stocks in the MSCI Emerging Market Index will rise further in May.

The reticence to own Chinese shares does have advantages though.

The gloomy view money managers have on China has also softened the blow of the market tumult somewhat, as underweight positions in China have been some of the hardest hit.

Follow CNBC International on Twitter and Facebook.