{"id":147343,"date":"2021-12-14T15:33:34","date_gmt":"2021-12-14T15:33:34","guid":{"rendered":"https:\/\/precoinnews.com\/?p=147343"},"modified":"2021-12-14T15:33:34","modified_gmt":"2021-12-14T15:33:34","slug":"india-is-becoming-less-and-less-attractive-for-fiis","status":"publish","type":"post","link":"https:\/\/precoinnews.com\/business\/india-is-becoming-less-and-less-attractive-for-fiis\/","title":{"rendered":"‘India is becoming less and less attractive for FIIs’"},"content":{"rendered":"
‘In the overall global portfolio, India’s weighting has come down in the past seven months.’<\/strong><\/p>\n After a world-beating rally, domestic markets are losing their allure to emerging market peers.<\/p>\n Sunil Tirumalai<\/strong>, executive director-India equity strategist, UBS Securities, explains why foreign portfolio investors have turned cautious on India.<\/p>\n In conversation with Samie Modak<\/strong>\/Business Standard<\/em>, Tirumalai says this year’s rally is primarily driven by domestic money and those flows could dry up.<\/p>\n How has India managed to outperform most global peers this year?<\/strong><\/p>\n One, COVID-19 impacted the unorganised or the informal economy, but the listed space has largely benefited.<\/p>\n Two, in 2020-2021, despite the economy shrinking 7.5 per cent, the earnings growth for Nifty companies was probably the best in a decade.<\/p>\n The recovery from lockdowns has been reasonably good without any big government stimulus.<\/p>\n Three, the domestic supplies of vaccines helped and the execution programme was stellar.<\/p>\n Why have all foreign brokerages suddenly turned negative on India?<\/strong><\/p>\n We have been fairly cautious on the Indian market since June 2021.<\/p>\n At a regional level, UBS has had an ‘underweight’ stance on India.<\/p>\n We did reiterate that about three weeks ago, when our outlook for the next year came up.<\/p>\n There are a few things now, which are beginning to go against India.<\/p>\n One is, of course, commodity costs. India is an importer of most commodities and costs are beginning to hurt.<\/p>\n All commodity-heavy EMs have done really well.<\/p>\n Companies are talking about pain from commodity inflation and margin pressure.<\/p>\n Gross margins are the lowest in at least five to six years.<\/p>\n Only around 40-45 per cent companies are able to beat consensus expectations on operating profits.<\/p>\n In the past six months, India has underperformed on earnings upgrades.<\/p>\n On the other hand, the Indian market has outperformed other EMs.<\/p>\n In our universe of 12 large EMs, India is probably the ninth or 10th in terms of how earnings are growing.<\/p>\n Also, we are also heading into a kind of politically active period with elections around the corner.<\/p>\n The repeal of farm laws has taken some sheen off a reformist image the Centre had built.<\/p>\n While I mentioned vaccination as a success story, the footnote is not so great.<\/p>\n We seem to be complacent about the second dose.<\/p>\n How are foreign institutional investor flows shaping up?<\/strong><\/p>\n The last major buying by FIIs happened in March.<\/p>\n When India’s second wave started, FIIs stopped buying. It’s a relative game.<\/p>\n If you see positive momentum in other countries, flows would ideally go there.<\/p>\n In the last six months, India’s earnings have not gone anywhere.<\/p>\n For an investor, who has the option to choose across markets, India is becoming less and less attractive.<\/p>\n FII flows were soft in the June and September quarters.<\/p>\n This is when there was a massive exodus of money from China.<\/p>\n This was at a time when trillions of dollars were being taken out of China.<\/p>\n In the overall global portfolio, India’s weighting has come down in the past seven months.<\/p>\n But the markets have continued to do well.<\/p>\n Our belief is that it is primarily driven by domestic money.<\/p>\n For the first nine months of 2021, we’ve probably seen $28 billion of domestic household flows enter the market, either directly or through mutual funds.<\/p>\n This scale of money is the fuel which is keeping the market up.<\/p>\n As a consequence, India has become very unattractive from a valuation perspective.<\/p>\n Will household savings continue to flow into the markets?<\/strong><\/p>\n We have early signs of fatigue in household buying.<\/p>\n Just normalisation of life and consumption patterns will lead to lower savings and hence, lower flows.<\/p>\n The flows into equity MFs have been slowing down.<\/p>\n Most activity is only in a few high networth individual accounts.<\/p>\n All you need is a small minority of retail investors to change their mind.<\/p>\n A vast majority of demat account holders are minuscule in the grand scheme of things.<\/p>\n How do you see policy normalisation impacting the equity market?<\/strong><\/p>\n The linkage with the US Federal Reserve action has become weaker and weaker over the years.<\/p>\n If the Reserve Bank of India acts on draining out liquidity and 10-year bond yields start going up, that is when Indian equities could start correcting.<\/p>\n The Indian bond markets are more expensive than other countries.<\/p>\n It is basically liquidity in all forms that is keeping rates low and valuations high.<\/p>\n If that starts reversing, it could be a problem.<\/p>\n What is your view on technology initial public offerings?<\/strong><\/p>\n IPOs in the tech space is a fresh new wave.<\/p>\n In the US and China, investors have had good experience of investing in these businesses.<\/p>\n In the long term, if your stock choice is right, you can get really good returns.<\/p>\n There is a belief in India’s long-term growth potential.<\/p>\n Some of these businesses have strong capabilities and are expected to do really well.<\/p>\n Most people want to have a slice of that.<\/p>\n What is your view on commodity, banking, and information technology stocks?<\/strong><\/p>\n I would be positive on banks, negative on IT and commodities.<\/p>\n Over the next six to nine months, UBS expects reduction or a fall in commodity prices.<\/p>\n We have already seen the best of commodity rally play out.<\/p>\n But then, there can be some sub-segments. We like the refining business, in particular.<\/p>\n Private banks are one of my preferred spaces.<\/p>\n They have underperformed since the market is worried about asset quality.<\/p>\n One or two quarters later, there should be some comfort on that front and that’s when the catch-up should happen.<\/p>\n All the positives in the top line are fully factored in.<\/p>\n We’re already talking about double-digit growth for a few years on this scale.<\/p>\n The cost pressures are also quite intense.<\/p>\n Feature Presentation: Aslam Hunani\/Rediff.com<\/em><\/strong><\/p>\n