Global brokerage Bernstein said on Monday that there is little reason for foreign investors to put money into the world's fastest-growing major economy, as Indian large-cap stocks fail to deliver the growth needed to justify what the firm calls "absurdly high valuations." The ongoing foreign exodus stems from the difficulty Indian corporate giants face in reinventing their businesses amid technological disruption, according to the report.

"Many of India's large-cap stocks represent an economic era that has already passed," Bernstein wrote in the report. These companies are unable to produce the "high-growth" earnings that would validate the market's "excessively stretched valuations." The report added that "most large enterprises are not investing for the future, but rather consolidating their existing business structures, often relying on policy protection to shield themselves from global competition." Bernstein also noted that even with substantial cash reserves, India's top conglomerates are reluctant to fund the country's push to scale up in emerging technologies such as electric vehicles and semiconductors.

Where the money is flowing out

Data from India's depository NSDL shows that after a brief pause in selling during July and August, foreign investors resumed offloading Indian equities in September. So far this month, foreign portfolio investors have directly sold $1.7 billion worth of Indian stocks, bringing the year-to-date cumulative outflow to nearly $26 billion, a record high. The Nifty 50 index, India's large-cap benchmark, has fallen more than 10% since January, placing it among the worst-performing stock indices globally.

However, the latest data indicates that India's real economy continues to post strong growth among major global economies. Earlier this month, several experts noted that India's economic expansion is not fully reflected in the core benchmark index, as new growth momentum is more visible in mid-cap and small-cap indices rather than the Nifty 50. Mid-cap and some small-cap stocks offer greater exposure to manufacturing, fintech, and consumer technology, sectors whose share of the national economy keeps rising. Data from Indian brokerage Ambit Capital shows that Nifty 50 constituents posted an average earnings growth of 11% in the June quarter, while mid-cap companies saw year-on-year profit growth of 31%.

Bernstein's report acknowledged the growth potential of small and mid-cap enterprises, but pointed out that these assets are not suitable for large-scale allocation by institutional investors, citing their "overall small size, low free-float share, insufficient liquidity, and scarce sell-side research coverage." According to LSEG data, several domestic giants, including Reliance Industries and HDFC Bank, India's largest private lender, are currently trading near their 52-week lows. The information technology sector, which holds significant weight in the Nifty 50, is facing dual pressure on revenue and margins due to the global AI wave.

Why patience may not pay off

Meanwhile, India's leading conglomerate Tata Group is mired in internal disputes that could delay its plan to build the country's first本土 semiconductor wafer plant. With no major domestic AI champion and an IT services industry severely disrupted by rapid advances in artificial intelligence, the market widely views India as a "short AI trade." However, Bernstein believes that even if the global AI investment boom cools, India's foreign capital outflow is unlikely to reverse fundamentally. "Don't naively assume that once the AI trade settles and the Middle East crisis is resolved, overseas capital will naturally flow back into India," Bernstein stated.

The Nifty 50 is the large-cap benchmark index of the National Stock Exchange of India, comprising 50 constituent stocks weighted by free-float market capitalization and rebalanced semi-annually. The financial services sector holds the highest weight at 37.92%, followed by information technology at 13.01% and energy at 12.07%. The top ten constituents by weight include Reliance Industries, HDFC Bank, ICICI Bank, Infosys, and Tata Consultancy Services.