Despite a worsening macroeconomic scenario, overseas investors continue to prefer Indian shares over their emerging markets and Asian peers due to stable corporate earnings, expectations of government action and increasing probability of further global monetary easing.
Foreign institutional investors (FIIs) have poured in about Rs 62,412 crore ($11.76 billion) into Indian shares this year till August 27, Securities and Exchange Board of India (Sebi) data showed. This is the highest among Asian countries for which Bloomberg compiles data.
The Bombay Stock Exchange (BSE) benchmark, Sensex has gained 13 per cent so far this year in rupee terms (7.6 per cent in dollar terms), making India one of the best performing markets in Asia. Indian shares have also outperformed other emerging markets like China, Russia and Brazil during this period.
According to JP Morgan, Indian equities have outperformed other emerging markets in the last three months on expectations that the government would act. The foreign bank is of the view that the markets are hoping for government measures like a diesel price rise, allowing or increasing direct foreign investment limits in multi-brand retail and aviation and faster clearances for investment projects, particularly in the power and coal sectors.
However, JP Morgan strategists warn bulls are now getting edgy due to policy inaction. “The first volley of reforms was expected after the Presidential poll in late July. But this has not been the case. The monsoon session of Parliament has been stalled following the Comptroller and Auditor General of India’s report on coal block sanctions. Coalition allies continue to be reluctant on key reforms,” Bharat Iyer, executive director and head of India equity research at JPMorgan, stated in a strategy report early this week. “Expectations are now for the government to move in the eight-week window after the monsoon session of Parliament concludes (September 7) and before the state elections in Gujarat in November.”
Indian shares have also performed better than other comparable markets on anticipation of monetary easing by the US Federal Reserve and the European Central Bank (ECB), according to CLSA.
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“Despite the continued downward earnings momentum in corporate earnings, MSCI India has moved up by five per cent over the last one month on increasing probability of further global monetary easing,” CLSA's India strategists Mahesh Nandurkar and Bhavesh Pravin Shah on Wednesday stated in a report. “While India is the best risk-on market, our analysis of the previous six global liquidity events highlights that market performance has been weak post facto if the index has already moved up on anticipation, which seems to be the case now."
However, strong FII inflows into India this year have also raised concerns among some market participants about their authenticity.
BNP Paribas, in a report early this month, stated almost half the FII flows in India seem to have come from unexplained sources.
“This could lend credence to the oft-repeated conspiracy theory that a lot of FII flows into India are, in reality, Indian money disguised as FII money,” said Manishi Raychaudhuri in a report early this month.
However, BNP Paribas is of the view that FIIs are buying Indian shares because of the country's relative earnings stability. “Over the past one to two quarters Indian earnings estimates have remained stable while those for large Asian peers have declined 7-10 per cent,” Raychaudhuri said in the report.
Raychaudhuri believes the answer to the riddle why FIIs are not selling India when selling the rest of Asia lies in the kind of stocks that FIIs have bought in India recently. “Over the past two to three quarters, FIIs bought predominantly stocks that offer visibility on revenues and earnings. The top 15 stocks, contributing 65 per cent of FII buying, fall largely in this category. In contrast, in 2008, FIIs sold India heavily when they sold the rest of Asia,” he said in the report.