FPI Stays Bullish on India

US, China continues to worry while FPI stays bullish on India.

Of all the incremental flows coming into EMs almost 50% of EM fund managers are overweight on India in comparison to the weightage of the country in the MSCI EM index which may result in supposedly getting a larger share and showing that the investors are apprehensive towards a sharp recovery in the earnings of the second half along with ascension in fiscal numbers.

For the first half of the year 2015 when Chinese shares soared, the Indian equities took a hit as the global investors were wary of reformative steps and believed that a positive outcome was not possible sooner. The estimated weightage on Indian stocks was pared by global fund managers. But result so far has shown positive return as India has emerged as the only Asian market consisting of foreign portfolio investors (FPIs)as net buyers combined with it being the only large emerging market (EM) in Asia posting a positive return in dollar terms.

With results posted so far by Asian EMs Indian equities likely have more chances of attracting a larger share of the incremental flows. A recent CLSA note states “Our recent meetings with investors in Singapore and Hong Kong reveal that India continues to be a ‘favored’ market among regional investors. While some investors have reduced India’s weight, most investors believe in sharp 2HFY16 earnings recovery and focus on the long-term structural positives, retaining their overweight.”

The overweight on Indian equities from FPIs are as much as 200 to 300 basis points in comparison to their respective benchmark indices. In the MSCI EM index, India holds a weightage of 7.7%, and as per the available result between March and June Indian market had underperformed by 5% against the EM index. But afterward, the indices outperformed the index of MSCI EM by 9.2% after the Nifty bottomed out at the 7,965 level.

The reasons attributed by the experts for the outperformance of Indian equities are commodity price correction and also the instability in the Chinese equity market. As per the statement of Jonathan Schiessl, head of equities at investment firm Ashburton Investments which manages assets worth $12 billion “The outperformance is primarily due to external factors and India’s relative `calmness’ in the EM space.

By external factors, I mean falling commodity and energy prices, and obviously the extreme volatility coming out of China, “He also believes that the valuation of Indian equity seems more attractive on a relative basis due to the recent underachievement of EMs.

Correction in prices of commodities will favor India and will be a crucial contributing factor in enabling the country to save an additional $45-50 billion due to a fall in the prices of crude oil. The import basket of India which includes commodities like crude oil, coal, and gold and makes up 42% of the basket, a sharp decline and correction of prices of the above commodities will favor India’s fiscal math.

Asian Strategist at Societe Generale, Vivek R. Misra said “Fall in oil prices has given a boost. As far as volatility in the Chinese market is concerned it cuts two ways. In short term, it may hurt the sentiment towards emerging markets, second, a rate hike from the US federal reserve is likely to lead to higher volatility,“ He also added,  “Indian equities continue to remain attractive and is among our overweight calls.“