After a long run as the emerging market equity sweetheart, investors may be falling out of love with India stocks.
"Prime Minister Modi's victory last May set the stage for a significant amount of reform optimism and encouraged portfolio inflows," HSBC said in a recent note. Now "India is the most over-owned equity market in Asia by mutual funds," it said, citing EPFR data. It cut its rating on the market to underweight from overweight.
"As other markets become more interesting, India could be used as a funding market," HSBC said.
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Funds had flowed into the market in a wave of optimism after Prime Minister Narendra Modi and his ruling Bharatiya Janata Party (BJP) swept into power promising much-needed reforms. Some of those reforms have hit speed bumps recently, with parliamentary bills aimed at making for businesses to buy land and to reform taxes getting deferred earlier this month.
That may cool some of the optimism of foreign investors whose portfolio flows sent the Sensex surging nearly 29 percent last year, with index shedding around 0.6 percent year-to-date.
The vagaries of portfolio flows aren't the only reason HSBC is looking askance at the market, with the bank also citing concerns about earnings.