Strong macros, falling crude attract FPIs to equities

Strong macros, falling crude attract FPIs to equities

By Ashley Coutinho

Foreign portfolio investors (FPIs) have shopped for equities worth $8 billion since July, aided by a correction in commodity prices and India’s relatively strong macro fundamentals. This is after yanking out $33.5 billion between October and June.

India’s relative outperformance vis-à-vis other emerging markets has gained traction in recent weeks and the outperformance is now highest since 1999-2000 period, said the brokerage. The 50-share Nifty is trading at a valuation of 19x its 12-month forward P/E as on September 7.

“India’s sustained growth momentum and the relatively benign inflation in the context of continued global disarray on account of tensions in Ukraine and the Taiwan straits, have attracted FPIs back to Indian equities,” said UR Bhat, director at Alphaniti Fintech.

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India is seen as the favourite among emerging markets because of the relative resilience of the rupee and forex reserves, as also relatively low levels of external debt, current account and fiscal deficits.

“On a growth adjusted basis, Indian equities are better placed vis-à-vis competing emerging markets while offering much better sector diversity and a huge domestic market for goods and services,” said Bhat.

India’s weightage in the MSCI EM index has shot up to about 14.49% now from 8.1% at the end of October 2020. The number of constituents in the MSCI EM Standard Index is now at 108 stocks, compared with 87 as of October 2020.

“The two factors that have driven fresh inclusions and an uptick in the weightings of existing Indian constituents are the new regime on foreign ownership limit taking effect in the November 2020 review and domestic stocks’ strong outperformance to other EM counterparts,” said Abhilash Pagaria, head of Edelweiss Alternative and Quantitative Research.

FPIs have now turned their attention to domestic-facing sectors such as banks and consumption stocks which are immune to global shocks, according to Hitesh Jain, lead analyst – institutional equities at YES Securities. India’s thrust on manufacturing and a rebound in industrial output are also drawing investments in capital goods.

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The Nifty Bank and Nifty Consumption indices have risen 17.6% and 20%, respectively, in the last three months.

“FPIs’ under-ownership of Indian equities compared to historical levels, exodus of investments from Russia finding an alternative in India and funds looking at diversifying investments away from China are some of the factors prompting resumption of FPI inflows in Indian equities,” he said.

An increase in global crude oil prices, aggressive tightening by the US Federal Reserve and an upmove in the dollar index, however, could play spoilsport and impact FPI flows, said experts.