Equity Strategy- Premium valuation a key concern for FPIs

Equity Strategy: Premium valuation a key concern for FPIs

We met with c.50 fund houses in Singapore and Europe physically. India’s positioning has come down to neutral/slight OWT level; implying 50-100bps weight reduction on India over the last 3-6 months. Premium valuation still remains the key discomfort along with higher oil, although there’s a buy-in on the structural India growth story. Property, auto and banks were discussed the most. Some incremental interest in staples as well due to rising food inflation.

India positioning lightened but no hurry to add: Since Oct, FPIs (Foreign Portfolio Investors) have broadly reduced India weightings by 50-100bps, evident in $19-bn outflow. The outflow has been primarily due to valuation concerns. Most investors were surprised with the market resilience despite oil worries and ensuing twin deficit concerns on India. India’s Nifty has OPFed EM/AxJ benchmark by 6/7 ppts CYTD, despite these macro concerns and strong outperformance during CY21. Some UWT investors didn’t appear to be in any hurry to add India as they continue to prefer Latam and, incrementally, ASEAN.

Our view: At 19.3x, Nifty trades at 16% premium to the last 10-year average and ~70% premium to EM benchmark, ~30ppt above average. Also, with the 10-year yield moving up by 24bps since the last policy, the yield gap has risen to 196 bps which is in an uncomfortable zone, implying unfavourable risk reward. Our Dec-22 Nifty target at 17,500 implies a sideways movement due to the valuation concerns.