Indian equity markets have accounted for nearly half of the foreign fund outflows from the emerging markets (EMs) in the current calendar year.
Foreign portfolio investors (FPIs) have trimmed their exposure to Indian markets by $2.6 billion since the beginning of 2016 – only second to South Korea, which witnessed outflow of $2.64 billion, Bloomberg data showed. Foreign funds have withdrawn $5.32 billion from the EMs so far in 2016.
Selling by FPIs is in contrast with the previous calendar year when Indian markets outperformed other EMs. In CY15, India witnessed FPI inflows of $3.27 billion even as foreign funds were net sellers across other emerging markets such as South Korea, Indonesia and Taiwan, data showed.
According to Manishi Raychaudhuri, Asia-Pacific equity strategist at BNP Paribas, although India has not outperformed in the last three months, in the long term, India continues to be one of the best investment destinations in Asia. “There were several reasons for the recent underperformance. Earnings, for one, are still not picking up due to weak demand in industrial and rural sectors. The government’s legislative initiatives continue to be hindered in the Parliament’s upper house, and post the BJP’s loss in the Bihar elections, the Opposition seems increasingly belligerent,” Raychaudhuri said.
Despite the steep decline in Indian equity markets, the country continues to command one of the highest valuations among EMs. The Sensex’s forward price-to-earnings (P/E) ratio currently stands at 14.41 – one of the highest among emerging markets.
This premium valuation of India is due to stable macroeconomic environment, market participants said. Valuations of Indian markets inched higher in the later part of 2013 on hopes that a new government at the Centre would push for economic reforms. The euphoria increased further in 2014 when the BJP-led National Democratic Alliance (NDA) government assumed office following a decisive and clear mandate. The P/E of Sensex crossed 15 times in Calendar 2015 even as the Sensex lost 5% during the year, Bloomberg data showed.
In contrast to FPI selling, domestic funds continue to be net buyers in the Indian equity markets. Domestic institutional investors (DIIs) comprising banks, insurance companies and mutual funds have net purchased equities worth Rs 20,313.62 crore since the beginning of 2016, Bloomberg data showed. During CY15, DIIs bought equities worth Rs 67,261 crore – the highest yearly buying by domestic funds since 2008.
The current streak of market correction in EMs was triggered by falling crude oil prices and concerns over a possible slowdown in China. All the major Asian markets have declined in the range of 10%-24% in 2016 so far.
