India lost $31 billion in foreign flows despite heavy Korea, Taiwan selling

India’s ability to attract foreign capital cannot be inferred from selling elsewhere, particularly when much of that activity is driven by local market dynamics. Leveraged positions in South Korea and Taiwan are a case in point. Taiwan’s margin-loan balance reached a nominal record in July, while South Korea has seen substantial activity in leveraged exchange-traded funds (ETFs). Bernstein said such locally financed positions are not a ready-made source of cross-border equity flows.

“Selling elsewhere has not translated into an Indian windfall till now,” the brokerage said, adding that much of the capital exiting these markets was never earmarked for India. The distinction also applies to portfolio allocations. A fund’s India weight can rise even as it sells Indian shares, if the fund’s overall assets shrink faster. Bernstein illustrated this with a $100 billion fund holding 10% in India: if its assets fall to $80 billion, India’s allocation could rise to 12% despite a reduction in the absolute value of its Indian holdings.

The brokerage said investors need to distinguish allocation percentages from actual flows. A higher India weight, in other words, does not necessarily mean fresh foreign money is entering the market. India’s valuation premium is another hurdle. The country trades at 18.6 times blended 12-month forward earnings, the highest among the markets compared by Bernstein using MSCI indices. Its estimated earnings-per-share growth for calendar years 2025-27, at 11%, is among the lowest in the group.

South Korea and Taiwan, by comparison, are expected to deliver much stronger earnings growth over the same period, Bernstein’s estimates show. India’s high valuations are harder to defend when earnings growth is lagging, the brokerage said. The valuation challenge extends beyond large caps. Mid- and small-cap stocks remain expensive, even as large-cap valuations have partly reset. Earnings forecasts have also faced downgrades and stagnation, leaving India with less room to attract capital on the strength of valuation or growth alone.

Bernstein said India must compete with other markets on price, earnings, risk and dollar returns. A correction in one investment theme or geography does not automatically create the next destination for capital. The brokerage’s broader view remains modestly positive for Indian equities for the rest of the year, with potential support from mean reversion, easing Middle East tensions and lower crude prices, as well as the outcome of US midterm elections and a possible reduction in long-term capital gains tax. But it said these catalysts are distinct from any assumed rotation out of AI-linked stocks or East Asian markets.