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Here’s what will decide if FIIs will stay put in Indian equities

Foreign investors will continue to stay put on Indian equities despite sky-high valuations at the benchmark levels, says Credit Suisse Wealth Management.

Foreign institutional investors poured Rs 99,963 crore into Indian equities during 2019, while their net investment in the debt segment stood at Rs 24,280 crore.

Credit Suisse said that India has become an even more structurally attractive destination for foreign investors after the corporate tax cut amid improving ease of doing business.

The overseas financial services firm said potential privatisation of some PSUs, strengthening of the insolvency and bankruptcy code and the introduction of Real Estate Regulatory Authority (RERA) have increased confidence in the formalisation of the economy, which is a positive for the listed universe.

“This structural shift is visible in heightened foreign direct investment (FDI) flows to India, which, on a trailing 12-month basis, have crossed the $30-32 billion range in last 10 years for the first time to reach $38 billion in September,” Credit Suisse said.

It said some of the distressed assets have already started changing hands, and some beaten-down financials have gotten capital support, which lends confidence in the financial market.

These factors could keep valuations elevated until earnings play catchup, it said.

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Foreign investors poured more than Rs 1 lakh crore into Indian equities in 2019, making it the best year for overseas investments in India since 2013. At $14 billion in dollar terms, it is the second-highest amount received by a major Asian market this year, after China.

Ajit Mishra, Head of Research, Religare Broking, said FPI flows would depend on factors like interest rate trajectory in the US, currency movement (USD-INR), global economic growth, domestic growth and valuation comfort (Indian markets).

“Many of these factors are likely to work in favour of inflows, except valuations of Indian market, which remain expensive despite the economic slowdown,” Mishra said.

Nifty currently trades at a 12-month forward price-to-earnings ratio of 18.5, about 1.5 standard deviation above mean. However, its valuation premium compared with the MSCI All Country World Index has contracted to historical average.

BSE Sensex advanced 15 per cent year to date, while the broader BSE Midcap index is down 4 per cent and the Smallcap index 9 per cent.

“Earnings growth expectations are elevated and do not completely price in India’s deteriorating growth outlook. The equity market tends to bottom out well ahead of the bottoming of GDP growth and earnings. While there is no quick fix to the economy, the government has been taking steps to improve corporate sentiment and address sector-specific stress,” Credit Suisse said.

Source: Economic Times