Japanese retail investors, who have historically been a steady source of inflows into Indian markets, have shifted their stance, marking a turning point in investment trends. According to Elara Capital’s report, last week saw $302 million in outflows from India-dedicated equity funds, with total outflows, including allocation funds, reaching $569 million. This is the most significant withdrawal of foreign capital from India since March 2022.
This reversal comes after months of robust Japanese investments, which totaled $8.6 billion from retail investors and $2.1 billion from institutional investors since November 2022. However, a weakening yen and the rising appeal of U.S. assets have triggered the shift, highlighting a broader reallocation of global capital, the brokerage said.
The brokerage’s report also underscores a surge in U.S. fund inflows following the country’s recent elections. Over the past three weeks, $110 billion flowed into U.S.-based funds, with $57.6 billion recorded last week alone—a record-breaking figure. Of these, 67% went into domestic U.S. funds, while 22% targeted Ireland-domiciled funds. Small-cap U.S. funds, in particular, have seen a resurgence, drawing $10.7 billion during this period.
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The “Yen unwind trade” has been a critical factor driving this shift. As the yen continues to weaken, Japanese investors are reallocating funds to dollar-denominated assets, further exacerbating the slowdown in emerging markets such as India, China, Taiwan, and South Korea.While high-risk assets like junk bonds maintain strong inflows, emerging market equities have softened, with commodities and bonds also struggling to recover over the past year. This marks a critical juncture for India, which had previously benefited from steady foreign inflows.Elara Capital cautions that this trend could signify the end of a significant cycle of foreign fund allocations to India. With global investors gravitating toward the U.S. and emerging market sentiment cooling, India’s equity markets may face prolonged pressure in the months to come.
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