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FPIs to wait for earnings pickup to put in more money in India

Mumbai: Foreign investors were buyers in the Indian equity market following Moody’s Upgrade of the country’s sovereign rating but their continued purchases will depend on how the economy and corporate Earnings perform. Market experts said the upgrade had boosted sentiment, with HSBC saying the development might help alleviate worries over potential macro risk in India due to rising crude oil prices. However, a pick-up in earnings growth and reasonable valuations are indicators that FPIs are likely to wait for before allocating fresh money into Indian equities, the experts said. FPIs bought shares worth Rs 1,276.62 crore on Friday, provisional data showed. “A credit rating upgrade is less of an issue for a market like India given the way it is structured. Similarly, we never worried about downgrade impact in 2013. The rating upgrade can lead to good sentiment for a day or two, but it will not cause any fundamental change,” said Gautam Chhaochharia, head of India research at UBS. FPIs have bought shares worth Rs 24,000 crore since the government announced its Rs 2.11 lakh crore recapitalisation package for PSU banks, the data showed. However, this also includes bulk purchases in some companies. FPIs had sold shares worth over Rs 23,300 crore in August and September. In October, they bought shares worth Rs 1,900 crore. For the current calendar year, FPIs are net buyers to the tune of about ?52,600 crore, including Friday’s provisional figures. The data includes purchases in bulk deals by FIIs. “The yields and credit spread were already reflecting the new credit rating. For flows to substantially improve, we need global flows to EMs to increase further, actual strong earnings growth rather than just hope or more reasonable valuations,” said Chaochharia. India’s benchmark Sensex is trading at 21.8 times FY18 earnings, compared to MSCI Emerging Markets index which is at 14.06 times. Sensex is up 25.4% for the year. Abhay Laijawala, head of research at Deutsche Equities India, said: “It (rating upgrade) is a major sentimental booster and it will lead to some ETF inflows, but for the flows to sustain we will need to see positive catalysts such as modalities of bank recapitalisation coming through. The most important factor is the trajectory of earnings growth. In the first half of FY18, Nifty earnings have grown by 1% (from the year ago period). We need 28% growth in the second half just to meet the consensus,” said Laijawala. Even in the debt market, significant inflows are unlikely. “The ratings upgrade will not lead to dramatic inflows overnight, partly because India has been a well followed story for a while. In addition, on the bond side, foreign participation limits are close to being at maximum permitted levels. We would recommend a modest increase in these limits over time,” said Luke Spajic, head of portfolio management for emerging Asia at PIMCO.
Source: ET



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