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Indian stocks see net outflows from FIIs so far in FY18

LiveMint logoLiveMint 24-09-2017 Ami Shah

Mumbai: Foreign investments in Indian stocks so far in this fiscal year, show net outflows as expensive valuations and tensions in Korean peninsula weighed on investor sentiment. US Federal Reserve’s unwinding plan also bothered investors, but asset managers say the impact of it is already factored in.

For the fiscal year to date, FIIs are net sellers of Indian shares to the tune of $450 million, even as Sensex has climbed 7.77% in the same period. However, Sensex has declined 2.34% from the record high of 32,686.48, seen on 2 August.

Graphic: Mint

“We have reduced a bit (of) India’s weight, because valuation level is on the high side and more importantly, because the outlook has become better in many other countries like China, Brazil and Russia,” said Hertta Alava, the Helsinki, Finland-based director of emerging market funds at FIM Asset Management Ltd.

India’s benchmark equity Sensex trades at 18.64 times one-year forward price-to-earnings (P/E) ratio, higher than its peers in China, Brazil and Russia which trade at 13.48 times, 13.43 times and 5.66 times, respectively. Sensex trades at a 46.2% premium to MSCI index which trades at 15.63 times one-year forward earnings.

“For the last couple of years, all the other major emerging economies were looking pretty weak (Brazil, Russia) or unstable (China). Now these economies have clearly improved,” she added.

Earnings growth has indeed been hard to come by for Indian companies, with initial hurdles of structural reforms, such as demonetisation and goods and services tax (GST), adding to the woes of already sluggish demand scenario.

Earnings downgrades are likely to continue, experts say, and a revival in earnings growth is not in sight for now.

While strong reforms and macroeconomic parameters has ensured that Indian equities have been one of the favourites in the emerging markets space, the lack of earnings revival cannot be ignored.

Sensex (earnings per share ) EPS estimates for fiscal year 2018, has declined 9.71% since the start of the current fiscal year to Rs1,553.27, while that for fiscal year 2019, has declined 4.98% to Rs1,936.12.

Meanwhile, on Wednesday, the US Federal Reserve left interest rates unchanged but signalled there could be one more rate increase by the end of the year despite a recent bout of low inflation in the US.

The Fed said also said it would begin in October to reduce its approximately $4.2 trillion in holdings of US treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis rattled markets from New York to Tokyo.

“The Fed has more or less delivered what the market was expecting. The repricing of the December rate hike is in the margin perhaps a bit hawkish, but nothing dramatic,” said Maarten-Jan Bakkum, senior emerging markets strategist at NN Investment Partners, in an e-mail from The Hague, Netherlands.

That was the popular view.

“I think Fed is doing what is necessary and I would be more worried if their balance sheet would grow forever,” Alava of FIM said.

“Tightening will be anyway very gradual and I don't see that being a big negative for EM. We already experienced taper tantrum and most emerging economies are now less vulnerable than those days,” Alava added.

Many believed Indian markets would be insulated from the strong outflows, if any from the EM space due to Fed’s unwinding. Revival of earnings growth though, remains a big risk.

“We expect this (US Fed’s decision to shrink its balance sheet) to be a gradual process and the Fed will likely watch its impact for a while before taking a call on a rate hike,” Robert F. Baur, executive director and chief global economist at US-based Principal Global Investors Llc, said in an interview on Thursday, adding that the impact on flows into EMs will not be material till the rates go up meaningfully.

“However within the EM universe, India is relatively differentiated as it is a commodity importer, with economic recovery likely as uncertainty around GST and lingering effects of GST settle down,” Baur added.

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