There is a growing consensus that India’s equity markets have become expensive post the rally over the past few months, but foreign institutional investors (FIIs) continue to pour in money.
FIIs have invested Rs 6,450 crore in Indian equities so far in July. Since January, their investments have topped Rs 25,600 crore, according to data from depositories against the Rs 17,808-crore FIIs invested in the whole of 2015.
Fund managers and brokerages say a pickup in India’s economy and a good monsoon, which would boost consumption, make India attractive, even during the time when economic uncertainties continue globally, particularly in the wake of Britain’s decision to exit the European Union.
“India is one of few emerging market economies to have completed the painful macro adjustment process and is on a path of recovery. The growth recovery is becoming more broad-based, driven by public capex, FDI (foreign direct investment) and consumption,” said Chetan Ahya, MD, Morgan Stanley Asia. “Improved macro-stability conditions should minimise the impact from external uncertainties.”
Morgan Stanley has raised India’s economic growth estimates to 7.7% from 7.5% for calendar 2016.
Apart from better economic prospects, signs of earnings bottoming out in a few sectors, is another strong reason. “Through 2015, India saw the worst earnings progression in Asia, with all sectors’ estimates secularly declining. Some have clearly turned around now – consumer discretionaries, materials and utilities. We also see signs of earnings bottoming out in industrials,” said Manishi Raychaudhuri, Asia Pacific equity strategist at BNP Paribas.
The strong FII flows, coupled with continued investments by domestic institutional investors, have led to India’s equity market rallying sharply.
The Bombay Stock Exchange’s (BSE’s) benchmark Sensex is up 6.4% since the beginning of the calendar year. Equity markets fell sharply in January and February, tracking a drop in global equities. However, since the budget was announced on February 29, the Sensex has surged near 21%.
Macquarie too remains “overweight” on India, although it is concerned that valuations in India at 17 times, “could be highly-vulnerable to a pullback” if investors’ trust in longer-term earnings power is misplaced.
While, Credit Suisse also remains positive on India, saying the monsoon should reduce inflationary pressure and provide room for monetary policy easing, it would “await for a better entry level as valuations appear rich at a 12-month forward price to equity (P/E) ratio of 17.2,” the investment bank said.