After pretty much staying away from Indian stocks in 2015, foreign portfolio investors (FPIs) may be in no hurry to return next year. Foreign funds bought just about $3.1 billion worth of equities last year, less than a fifth of the purchases made in 2014 of a net $16 billion.
While many were miffed at the government’s demand they should pay minimum alternate tax (MAT) — this alone led to outflows of $3.6% between May and September — poor corporate earnings as also the slow pace of reforms left them cautious. The government has since clarified FPIs will be exempt from MAT, but Neelkanth Mishra, MD, equity research, Credit Suisse Securities, believes FPI interest could remain relatively dull. Flows, he feels, could be impacted by a general sell-off in emerging market funds and redemption pressures in a few West Asian economies that are grappling with the sharp decline in commodity prices, especially crude oil.
“India as an asset class is emerging because India-centric funds are continuing to attract higher inflows. However, these are not yet large enough to offset the primary trend of outflows from emerging markets,” Mishra said.
Sanjeev Prasad,co-head, Kotak Institutional Equities, believes interest in EMs among global investors is waning due to their poor performance. “The risk we run is that if any other large EM market starts looking more attractive from a valuation standpoint, investors may take a call to switch out of India into that market,” Prasad said.
India now trades at a fairly expensive 16 times estimated one-year forward earnings.
Also, within the EM universe, most foreign investors have an overweight stance on India given the country enjoys macroeconomic stability and the potential for growth in the medium term due to the demographics.
As such, while India may be a favourite market, investors are today a more realistic lot. Deutsche Bank economists Taimur Baig and Kaushik Das point out that while India’s growth may outpace that of China, the sentiment at the ground level is subdued. “Working through the sizeable corporate debt burden, a lacklustre export environment and complicated political dynamics has turned out to be much harder than expected,” they wrote recently.
India is now expected to grow at 7.4 % in FY16, lower than the earlier estimate of 8% in April. “A sharp correction in global commodity prices and 125 basis points (bps) rate cuts from the Reserve Bank of India have not yet kick-started investments or added to buoyancy of consumption,” they observed.
Profit downgrades have come in thick and fast to a point where Sensex earnings are now expected to grow at an anaemic 5% in FY16; Bloomberg consensus estimates for FY16 are down by a fifth from Rs 1,890 at the start of 2015 to Rs 1,457. Helped by the smaller base, though, earnings could bounce back in FY17. However, Prasad believes it would be very difficult to see 15-20% earnings growth unless real GDP growth is 10% and inflation is contained at the RBI’s target of 4% by FY18.