Bernstein says India’s large-cap stocks are stuck in a ‘bygone economic era’ as foreign investors head for the exits

Global brokerage Bernstein said on Monday that foreign investors have little reason to invest in the world’s fastest-growing major economy, placing the blame for the continued exodus of foreign investors on large Indian companies struggling to reinvent their businesses in the face of disruption from new technology.

“Many of India’s large-cap stocks represent a bygone economic era,” Bernstein said in the report, adding that these companies do not offer “high growth rates” to justify the “very high valuations” of the Indian market.

“Rather than investing in the future, most[large companies]are reinforcing the past, often hoping that policies will continue to protect them from global competition,” the report said. The report said large companies with “the deepest pockets” are reluctant to provide the capital India needs to scale up emerging technologies such as electric vehicles and semiconductors.

Foreign investors resumed selling Indian stocks in September after a brief hiatus in July and August, according to data from deposit trading firm NSDL. Foreign portfolio investors have directly sold $1.7 billion worth of Indian stocks so far this month, bringing total sales this year to a record high of nearly $26 billion.

Since January, India’s large-cap index Nifty 50 has fallen more than 10%, making it one of the world’s worst-performing markets. However, the latest data shows that India’s economy continues to be the fastest growing among major economies.

Earlier this month, experts told CNBC that India’s economic growth story is not reflected in the country’s main stock benchmarks because many companies in emerging sectors are included in mid-cap and small-cap indexes rather than in the Nifty 50 index.

Mid-cap stocks and some small-cap stocks have greater exposure to manufacturing, fintech, consumer technology, and other sectors that are increasing their share of economic activity. As a result, Nifty 50 companies saw average profit growth of 11% in the June quarter, while mid-cap stocks reported 31% year-on-year growth, according to data from Indian brokerage firm Ambit Capital.

In his report, Bernstein confirmed his expectations for small and mid-cap companies, but said these companies “remain subscale, have low float, limited liquidity, and poor coverage,” making them not ideal for deploying large institutional capital.

Several large Indian companies Reliance Industries and the nation’s largest private sector financial institution. HDFC Bank It is currently trading near its lowest level in 52 weeks, according to LSEG data. IT companies, which account for more than 8% weightage in the Nifty 50, are facing revenue and profit pressure amid global AI adoption.

Meanwhile, Tata Group, one of India’s largest companies, is embroiled in a boardroom dispute that could affect its ability to invest in building the country’s first semiconductor manufacturing plant.

India is widely seen as anti-AI trade, as there is no local champion for artificial intelligence and the IT services industry faces the brunt of AI advances. However, Bernstein noted that even if global AI trade were to slow down, it was unlikely that there would be a major reversal in foreign capital flows in India.

“It would be foolish to think it’s just a matter of time and we’re just waiting for foreign money to flow into India once the AI ​​trade calms down and the Middle East crisis is resolved,” Bernstein said.