 "FPI inflows remain muted in February amid high valuations, shows data")
Inflows from foreign portfolio investors (FPIs) into domestic equities remained muted in February, weighing on the market performance.
Market observers said expensive valuations in India saw global funds favour other emerging market (EM) peers such as South Korea, Taiwan, and Indonesia.
According to Bloomberg data, South Korea saw FPI inflows of $8.4 billion, which helped its benchmark Kospi jump nearly 10 per cent from its January lows.
Similarly, the Taiwanese markets saw inflows of nearly $5 billion, while Indonesia received over $1.1 billion, which helped both markets outperform India in February.
On a year-to-date basis, domestic benchmark indices are little changed amid the near $3 billion pullout by foreign funds. This year’s outflows come after $21.4 billion inflows during 2023.
Experts say a host of global as well as domestic factors are impacting fresh FPI inflows into India.
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Some believe global exchange-traded funds (ETFs) have become wary of EMs due to China’s sustained underperformance and India’s lofty valuations.
"It's a tricky situation for FPIs. For two years in a row, you bet on China, and you lost, and now if you invest in India, it will compound their mistake if China runs the other way and India declines, and that's weighing in their mind. And there have been some EM funds which have seen redemptions," said Pratik Gupta, chair executive officer and co-head of institutional equities at Kotak Securities.
The disappointing December quarter results by FPI-heavy blue-chip firms have dented flows. At the beginning of the year, megacaps such as HDFC Bank, Hindustan Unilever, and Bajaj Finance — where FPIs have substantial exposure — posted disappointing numbers.
Meanwhile, the hardening of US Treasury yields raised concerns about whether the US Federal Reserve (Fed) would lower interest rates at the same pace as the Street had priced in.
After settling at 3.86 per cent in December, the 10-year US bond yield is trading at 4.3 per cent at present, leading to the repricing of risky assets.
Moreover, foreign investors are unwilling to chase most stocks at current valuations.
“We believe the market is expensive, trading at 20.5x March 2025 P/E, significantly higher than historical averages and most other EMs. This is especially high considering a likely slower earnings CAGR of 11 per cent in FY25 and FY26 (versus 19 per cent in FY24),” added Gupta.
Despite the recent outperformance, Korea, Taiwan, and Indonesian markets trade at a discount to India.
Market experts said the rate cuts by the US Federal Reserve could be a positive trigger for inflows to India whenever they happen this year.
"Historically, rate cuts mean US dollar peaks, and funds start flowing towards emerging markets, and from that, both China and India should all be beneficiaries," said Gupta.
Some experts opined that there could be fresh buying after the elections.
"There is nothing negative about India apart from the fact that valuations are challenging compared to some emerging markets. With gains in the last three months of 2023, investors might have priced in the election outcome. They are in no rush to take fresh positions till the elections are over," said Andrew Holland, chief executive officer of Avendus Capital Alternate Strategies.