According to BofA ML analysts, investors in Asia and UK/Europe are generally overweight on India and have added weight to Indian equity markets for the past six months.
The report, however, highlighted that the recent market outperformance and the overweight position of India vis-a-via other emerging markets continued to pose a risk to Indian equities, given the uncertainties on interest rate cycle and current account deficits.
The report stated that China posed a near-term risk to India as fears of hard landing in world's largest second economy have abated.
While reforms and rate cuts are a structural positive, investors are now wondering whether we will see a cyclical shift into China. Though, structurally, the investors we spoke with still prefer the Indian economy over China, there is a possibility of a move towards China over next few months, said the report led by analysts Jyotivardhan Jaipuria and Anand Kumar.
Last year, investors were worried about hard-landing of the Chinese economy and were underweight on China. India received the highest capital inflow from foreign portfolio investors.
The report raised certain key questions the Reserve Bank of India stance on monetary easing based on the feedback BofA ML received from overseas investors. While BofA ML expected a 125 bps cut in interest rates by March 2014, investors were eager to understand the risks, given the fact that inflation forecast hovers around 7%. The worry that many investors highlighted was that any rally in commodity prices could put this under doubt, said the report.
Investors were also concerned about how quickly India's investment cycle could improve. The big risk for investors was Indias huge current account deficit and the dwindling import cover, which reduces Indias vulnerability to any external shock... The government reforms are a positive, but we probably need some repair of balance sheets before we can get a strong capex cycle, stated the report.
While BofA ML recommends lower quality rate sensitive names like DLF, overseas clients continue to prefer sticking to better quality rate-sensitive names like ICICI Bank, Tata Motors, and Maruti, concluded the report.