Asian investors turning cautious about Indian equities on high valuations: Report

By: |
February 17, 2021 5:08 PM

The RBI has said these gains may be due to liquidity glut overseas and warned of risks to financial sector stability.

Higher flows relative to other emerging markets suggest preference for India among foreign investors relative to peers, she said adding that the strong momentum is continuing in the new year as well.Higher flows relative to other emerging markets suggest preference for India among foreign investors relative to peers, she said adding that the strong momentum is continuing in the new year as well.

Asian investors are turning cautious about the Indian markets due to concerns over high valuations, a Swiss brokerage said on Wednesday.

Citing its conversation with 50 foreign institutional investors (FIIs) based in Hong Kong, Singapore, the US and the UK in the past three weeks, UBS Securities India said investors in the UK and the US remain optimistic about India.

The report comes at a time when concerns are being expressed about the long rally in equities since April last year, which has seen gains of over 80 per cent on the benchmarks.

The RBI has said these gains may be due to liquidity glut overseas and warned of risks to financial sector stability. The rally in the indices has happened even as the coronavirus pandemic has resulted in an economic contraction.

“While investors in the US and the UK remain optimistic, focusing on India’s medium-term growth potential, Asian investors were turning cautious due to market valuations,” its Economist Tanvee Gupta Jain said.

She said FII flows in India remain resilient and in the December 2020 quarter, the absolute quarterly FII inflows into India were the highest ever.

Higher flows relative to other emerging markets suggest preference for India among foreign investors relative to peers, she said adding that the strong momentum is continuing in the new year as well.

However, domestic institutional investors remain net sellers and saw the same even in the December 2020 quarter due to redemption pressures, while there was some reversal in the direct retail participation as well during the same quarter after nine months of growth.

The overseas investors took comfort from the stabilising COVID-19 situation in India for now and this is helping improve confidence in the economy and willingness to spend and invest before full herd immunity is achieved, the brokerage said.

India is the largest vaccine manufacturer globally and vaccine availability is likely to improve for the larger population after September this year, it said. UBS Securities maintained its base case view that India will see the quickest growth rebound in Asia in FY22.

While these are still early days to estimate that a durable investment cycle recovery is on the cards, it seems that the drag on growth from muted capital expenditure could be over, the brokerage said.

It added that a sustained thrust towards investment would have a multiplier impact on India’s growth and create much-needed jobs.

The fiscal policy has turned proactive and the RBI’s monetary policy will play a complementary role in the year by keeping a status quo on rates and having an accommodative liquidity stance.

As recovery gains momentum, it expects the RBI to begin the process of monetary policy normalisation to ensure financial and macroeconomic stability.

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