India Surpasses China as Top Emerging Market for Investment, According to Global Survey

India has emerged as the most attractive emerging market for investing, overtaking China, as stated by 85 sovereign wealth funds and 57 central banks, which collectively represent USD 21 trillion in assets.

In a comprehensive report by Invesco, a global investment management firm, India's improved business and political stability, favorable demographics, regulatory initiatives, and investor-friendly environment were identified as key factors contributing to its growing appeal. The study, titled 'Invesco Global Sovereign Asset Management Study,' incorporated insights from 142 chief investment officers, heads of asset classes, and senior portfolio strategists from the surveyed sovereign wealth funds and central banks.

Investor reactions on how India surpassed China

Investors are now reevaluating their portfolios due to persistent high inflation and real interest rates. The report highlighted that sovereign wealth funds are favoring fixed income and private debt, while Emerging Markets (EMs) exhibiting solid demographics, political stability, and proactive regulation are being viewed as prime investment destinations. Notably, India has garnered particular interest among sovereign investors, surpassing China in terms of attractiveness for investing in Emerging Market debt.

A sovereign fund based in the Middle East remarked, "We don't have enough exposure to India or China. However, India is a better story now in terms of business and political stability. Demographics are growing fast, and they also have interesting companies, good regulation initiatives, and a very friendly environment for sovereign investors."

India, along with countries like Mexico and Brazil, is benefiting from increased foreign corporate investment aimed at both domestic and international markets through strategies such as 'friend-shoring' and 'near-shoring.' This trend not only supports these countries' current account deficits but also bolsters their currencies and domestic assets, including debt.

According to the survey, India and South Korea remain the most attractive emerging markets for increasing investment exposure. A central bank based in the West indicated their intention to enhance their exposure to Emerging Market debt, particularly targeting real estate, infrastructure, and diversified industries.

The report also emphasised that over 85 per cent of the surveyed sovereign wealth funds and central banks anticipate higher inflation in the coming decade. In light of this, gold and emerging market bonds are being viewed as promising investment options. This shift may have been triggered by the West freezing nearly half of Russia's $640 billion gold and forex reserves in response to the Ukraine invasion.

The survey revealed that a "substantial share" of central banks expressed concerns about the precedents set by this event. Approximately 60 per cent of respondents reported increased attractiveness of gold as an investment, while 68 per cent noted a preference for keeping reserves at home, compared to 50 per cent in 2020.

Despite India's manufacturing PMI not contracting in the past year, foreign direct investment (FDI) inflows unexpectedly declined by 22 per cent to USD 46.03 billion in FY23, likely due to high inflation and recessionary trends in developed economies.

(With inputs from PTI)