India overtakes China as most attractive emerging market for investing

India has overtaken China as the most attractive emerging market for investing, according to 85 sovereign wealth funds and 57 central banks representing $21 trillion in assets.

India is increasingly viewed positively for its improved business and political stability, favourable demographics, regulatory initiatives, and a friendly environment for sovereign investors, according to a report by global investment management firm Invesco.

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The report titled 'Invesco Global Sovereign Asset Management Study' included views from 142 chief investment officers, heads of asset classes along with senior portfolio strategists from 85 sovereign wealth funds and 57 central banks.

Amid persistent high inflation and real interest rates, investors are recalibrating portfolios.

Sovereign wealth funds, it said, favour fixed income and private debt, while Emerging Markets (EMs) with solid demographics, political stability, and proactive regulation, particularly India, have emerged as prime investment destinations.

"Among the Emerging Markets, India has piqued sovereign investors' interest, overtaking China," it said.

India, it said, exemplifies the attributes sought by sovereign investors. "India has now overtaken China as the most attractive Emerging Market for investing in Emerging Market debt."

A development sovereign fund based in the Middle East noted, "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 is among a number of countries, including Mexico and Brazil, that are benefitting from increased foreign corporate investment aimed at both domestic and international demand through 'friend-shoring' and 'near-shoring'.

This was seen as helping fund current account deficits as well as support currencies and domestic assets including debt.

On the scale of attractive EM markets for increasing exposure, India and South Korea continue to be the most attractive destinations, it said.

One central bank based in the West explained that they were looking at increasing their exposure to EM debt and in particular focused on debt targeting real estate and infrastructure as well as other diversified industries.

According to the report, more than 85 per cent of the 85 sovereign wealth funds and 57 central banks noted that inflation will be higher in the coming decade.

In such a situation, gold and emerging market bonds are being seen as good bets. This shift may have been triggered due to the freezing of almost half of Russia's $640 billion of gold and forex reserves by the West in response to the Ukraine invasion.

The survey showed a "substantial share" of central banks were concerned by the precedent that had been set. Almost 60 per cent of respondents said it had made gold more attractive, while 68 per cent were keeping reserves at home compared to 50 per cent in 2020.

India's PMI for manufacturing did not contract in the past year, but against expectations, FDI inflows fell 22 per cent to USD 46.03 billion in FY23 amid high inflation and recessionary trends in developed economies.