Even so, most FIIs sound cautious on India outlook, talk of moderate returns.
India has emerged as the star performer in terms of attracting foreign inflows into the domestic equity market. In the past month, the net inflow into India has been significantly higher than the whole of Asia put together. This despite the fact that the undertone of most recent reports by leading foreign institutional investors (FIIs) has been cautious.
According to data collated from Bloomberg, India registered net inflows of $2.07 billion (Rs 9,700 crore) last month. This is much higher than the net inflow of $1.35 billion into the rest of Asia. Japan is the only other leading Asian economy that witnessed significant inflows, of $1.27 billion. The FII inflow data related to China, however, was not available on Bloomberg.
| THE FRONT-RUNNER | |
| Country | Net inflow ($ mn)* |
| India | 2,073.90 |
| Indonesia | 269.00 |
| Japan | 1,273.70 |
| Philippines | 172.00 |
| S Korea | -294.30 |
| Taiwan | -518.90 |
| Thailand | 390.70 |
| Vietnam | 23.00 |
| Pakistan | 37.50 |
| Source: Bloomberg *Month to date | |
Some of the other Asian economies that reported net inflows in the past month include Indonesia ($269 million), the Philippines ($172 million) and Thailand ($390.7 million). Vietnam and Pakistan registered marginal inflows. South Korea and Taiwan reported net outflows of $294 million and $519 million, respectively.
In India, the past seven days alone saw $952.5 million (Rs 4,450 crore) coming in. Incidentally, the Indian benchmark indices touched a new 30-month high late last week. The inflows came in the backdrop of market analysts terming the recent surge as a “liquidity-driven rally”.
While FIIs have been pouring ample liquidity into the Indian market, which boasts one of the best growth rates across the globe, foreign investors have also been talking about only modest earnings upgrade, going forward, apart from the low probability of high long-term returns.
In the latest India strategy report released on Tuesday, Morgan Stanley has noted that valuation and return on equity (RoE) need to be “watched closely”.
“For now, we do not believe that long-term returns from Indian equities are likely to move significantly from the recent trends (the trailing 10-year CAGR in returns is 14 per cent in rupee terms),” it explains.
According to Morgan Stanley, there have been several examples in history when “high growth has not translated into robust equity returns”. It, however, adds that India scores well on valuations and the ability of companies to translate macro growth into earnings. “Valuations in India are offering equity investors an acceptable level of equity-risk premium,” it said.
Macquarie attributes the recent foreign liquidity surge to the “relative attractiveness of the economy”. It, however, adds a word of caution: “It is important for such flows to sustain, since there is always a risk of short-term money flowing out in the event of risk aversion coming back into the system. In the past, very high flows have indicated modest returns for the market over the next 12 months,” says its latest India Strategy report.
According to Macquarie, earning upgrades have become modest in India, after registering a rapid surge in the past year. “There may be some downgrades in the near term as input cost pressures eat into the margins, but the underlying demand remains strong and bodes well for corporate earnings,” says the report.
While it is concerned on the valuation front, it feels the Indian market still has upside potential. Macquarie’s one-year forward Sensex target is 19,500.
