Singapore/Mumbai: Global investors disillusioned by Indian stocks that had been boosted by optimism over financial reforms are shifting their funds to emerging markets such as China, South Korea and Taiwan.
Portfolio funds have been gripped by concerns over retrospective taxes and the slow pace of land acquisition reforms that have held up $300 billion worth of corporate investments.
The sell-off has lately accelerated with investors dumping $2 billion of stocks over the past 14 sessions, depository data showed, leaving the market down 12 percent from its March highs.
"We have turned our India equity view to neutral from outperform" after its increases over the past year," Michael Strobaek, global chief investment officer at Credit Suisse, wrote in a research note.
Chinese stocks in contrast have rallied to seven-year highs on liquidity and a series of stimulus steps to prop up flagging growth. More stimulus measures such as interest rate cuts are expected to keep the rally going despite a pullback this week.
Shanghai`s Composite Index is up nearly 30 percent since the start of the year - the best performing Asian equity index so far this year - though it is set for its biggest weekly loss in six years this week.
Credit Suisse has also changed its Korean equity view to outperform from neutral and prefers H-shares, Hong Kong-listed Chinese shares, over A-shares, their mainland-listed counterparts "given the wide valuation gap," Strobaek said.
Stocks in South Korea and Taiwan have been supported by a positive outlook on corporate earnings and the economies` large current account surpluses. These factors were seen shielding them from the prospect of higher U.S. interest rates.
For these reasons, JP Morgan has also moved some money out of India into South Korea and Taiwan, said Adrian Mowat, chief emerging market and Asian equity strategist at JP Morgan.
Three Australian fund managers said they had reduced their Indian exposure in favour of China, citing the need for more clarity over the proposed minimum alternate tax (MAT).
"We are confused with the whole MAT issue, so have reduced shorts on China," one of the fund managers, managing $25 billion worth of assets, told Reuters.
Foreign investors have to pay a 15 percent tax on short-term stock gains, 5 percent on bond profits and nothing on long-term gains and the government is attempting to claw back unpaid taxes via the tax, raising concerns about retrospective taxation.
Since late 2014 many firms have received notices demanding MAT payments on past income, potentially bringing overall tax on these to as much as 20 percent.
Last month, Junior Finance Minister Jayant Sinha said notices had been issued in 68 cases, demanding total payment of 6.02 billion rupees ($94.6 million). But Finance Minister Arun Jaitley has estimated claims could reach as much as 400 billion rupees.
"The debate over retro taxes on capital gains is noise for investors, who may take the opportunity to reduce their Indian equity exposure and look for value elsewhere, like China A market, that has fantastic momentum and trading at attractive multiples relative to Indian equities despite the recent rally," said Arild Johansen, fund manager at FMG EM funds told Reuters.
Valuations are also a factor. Indian shares are trading at 3.24 times book value even after recent declines while Taiwan, at 1.76, is the third-cheapest.
Relative to earnings, Hong Kong is the least expensive at 11.94 times, followed by South Korea at 12.21.
