FIIs ended up pouring over Rs 4,100 crore on Tuesday, taking the total monthly investment in August to around Rs 51,200 crore in Indian equities, shows NSDL data.
What makes it more surprising is the fact that the investment comes at a time when the Indian market is trading at a valuation premium to its other emerging market (EM) peers.
Jitendra Gohil, Head of India Equity Research, Credit Suisse Wealth Management, India, cites three factors making FIIs soundproof to all noise surrounding the US Fed:
1) Low FPI ownership
FIIs were selling Indian equities relentlessly until July 2022, largely owing to high valuations and oil price spike. As a result, FPI ownership in the BSE500 index had fallen from near record highs of 21.5 per cent in December 2020 to a 10-year low of 18.4 per cent in June 2022. This is despite India’s stronger growth fundamentals compared to many other EMs as well as its own recent history.
2) Resilient earnings outlook
The consensus net debt/EBITDA for BSE500 is expected to fall to 1.1x for FY23E versus 3.0-3.5x in the pre-COVID 3-year period, and overall non-performing assets in the banking system have fallen below 6 per cent. “Hence, the earnings outlook for Indian corporates is resilient, in our view, compared to Asian economies, in particular China which is facing some structural problems,” Gohil told ETMarkets.
3) Macro matters
The RBI and the government have managed to contain inflation below 8 per cent so far and according to the RBI’s projections, inflation may come down below 6 per cent by March 2023. Furthermore, goods and services tax collection has picked up pace, credit growth is surprising on the upside, credit card spending is at an all-time high, the manufacturing purchasing managers’ index (PMI) recently came in at an 8-month high, and the real estate industry is gathering momentum after several years of moderate growth. These macro parameters, without doubt, instill confidence in the Indian economy and markets, the market expert said.
Credit Suisse Wealth is of the belief that the Indian equities’ valuation premium to its EM peers could remain elevated compared to the historical level of 45-50 per cent. The 12-month forward Nifty PE has expanded to 19.5x and is trading at one standard deviation above its 10-year mean.
On Monday, the Sensex had tanked 861 points only to rebound over 1,564 points the next day, leaving analysts who made bearish comments after Powell’s speech looking for explanations on the rally.
“The narrative that investors want to believe is that inflation has peaked and is falling in the US and that a soft landing is plausible. That doesn’t necessarily align with what we’re hearing,” said Craig Erlam, Senior Market Analyst, OANDA Corporation.
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