FPI under-owning gives India moat among EMs: CLSA's Alexander Redman

Redman noted that one cannot find such a good fit between equity market momentum and domestic mutual fund flows as in India

In a world less friendly for emerging markets (EMs), there is a case to up India's weight, CLSA's Chief Equity Strategist Alexander Redman said on Monday, asserting that the relative under-ownership of Indian equities by foreign investors gives the country an edge over its EM peers.

 

Foreign investors currently own 17.5 per cent of Indian equities, while some of its EM peers have as much as 58 per cent foreign ownership.

 

"That really does draw a bit of a moat around India. Considering Brazil's 58 per cent (foreign ownership), local investors cannot compensate for any net foreign selling. India can do that, and the 14 billion that foreign investors have withdrawn on a net basis out of Indian equities since the end of September has been more than compensated for by the SIP inflows and other mutual fund inflows," said Redman.

 

 

He said one cannot find such a good fit between equity market momentum and domestic mutual fund flows as in India. 

 

"Nevertheless, net foreign selling seen since the end of September has been unhelpful, and clearly domestic investors would like to see the end of that,” said Redman.

 

 He added that investors should be mindful of India's sensitivity to energy prices.

 

"A vast proportion of India's energy needs are imported. That impacts the current account and the currency, given that India has not yet been able to replace its energy requirements domestically. Now, some of that can be mitigated because 40 per cent of oil imports now are sourced from Russia,” said Redman.

 

Regarding corporate earnings, he said India is one market where gross domestic product (GDP) translates to earnings per share (EPS).

 

"One of the most frustrating parts of an EM portfolio manager's job is the inability of emerging markets to translate GDP through to EPS. The most obvious reason for that is a sectoral mismatch between economies and equity markets. There's a far better blend in India; the overlay is much stronger.  So, the conclusion from this, therefore, is if you want to know where EPS is going in India, you don't ask an analyst, you ask an economist," said Redman.

 

Although the Indian markets are still expensive after the recent correction, the valuation premium has come down, he said, adding that the recent correction will induce foreign funds to re-accumulate Indian equities.

 

Most EM managers have been nursing significant underweight allocation in the Indian market over the last year because of expensive valuations, Redman said, emphasising that they have been very frustrated to see India's outperformance and not being appropriately exposed to India.

 

"The disappointment in terms of the fiscal stimulus delivery in China and Trump's re-election provides the catalyst for foreigners to stop selling," said Redman.