India, China & stock markets: Will domestic flows save D-St from FPI onslaught?
Nomura India said valuation levels going back to 21 times on MSCI India should become an attractive point for investors to re-build positions in the market.
- Oct 8, 2024,
- Updated Oct 8, 2024 12:20 PM IST
The recent FPI outflows triggered a selloff in domestic stocks, raising fears India as an preferred emerging market (EM) is in for a de-rating. FPI ownership in Indian listed space is quite substantial, and so is the risk.
Valuations do not matter, until they do. The recent rise in battered Chinese shares do suggest money has started chasing valuations. "While investors have been concerned about India’s valuations for some time, we think valuations will now increasingly become a factor should there be any slowdown in foreign and even domestic flows," said Nomura India.
FPIs held $929 billion worth domestic shares at last count. This is against $565 billion worth Korean shares they owned and $377 billion worth China A shares they held, as per latest holding patterns. In percentage terms, they held 18.9 per cent stake in Indian equities against just 4 per cent for China A, 17 per cent for Thailand equities and 15.6 per cent for Philippines stocks. FPI ownership in Korea (34.6 per cent) and Indonesia (27.1 per cent) is comparably high.
Foreign investors have been net sellers this past week, which was partly absorbed by local institutional investors, and partly by non-institutional net-buying. Indian mutual funds’ cash balances as at end of August 2024 were at an almost a five-year high, with cash balances to the tune of $22 billion.
This, Nomura said, suggests an ability to absorb some of these foreign outflows.
"However, we are concerned that any potential buying from such institutional investors going forward may slow or even disappear, as they may attempt to pre-empt each other. This issue may also be further exacerbated should local retail flows (into domestic equity funds) also suddenly slow. Some media articles also have started noting the relative attraction of China equities for domestic India investors, which we think could possibly sway the views of local investors," Nomura India said.
While China has pledged fiscal support, details are still lacking, and should China disappoint on announcement and execution, investors will likely be quick to pounce back into India equities, Nomura India said.
"While the market rally is encouraging, more policy steps are needed to boost economic activity and confidence in China. The average Chinese citizen still grapples with job insecurity, stagnant salaries, and depreciating real estate and equity values. The policies announced so far can only smooth out the de-leveraging process. The critical task of repairing balance sheets still lies ahead," said Viram Shah, CEO at Vested Finance.
Nomura India said any significant sell-down in India stocks might prove to be a buying opportunity. This is because India's structural story is still intact, and while India will likely see a cyclical slowdown ahead, it would not be a structural slowdown.
"India remains a large and liquid market with generally higher-quality companies, and we think India will continue to benefit from longer-term themes such as supply chain relocation, and a push toward investment led-growth," Nomura India said.
Nomura India said EM equity investors have been underweight India equities, and thus there is some buffer in the form of how much larger their underweights can go.
"If the recent rally in China equities becomes more self-sustaining amid a large fiscal stimulus, and should local investors in China (which so far have been largely out of the market bar the last couple of weeks) become far more involved, this may force even foreign investors to chase China equities higher. As that occurs (although it's not clear to us if this will be the case), India and other regional markets might see somewhat sustained underperformance," Nomura India said.
At present, MSCI India trades at forward PE of 24.1 times against a post-2015 average of 19.5 times after last week's pullback. India stocks still trades at 77 per cent premium to Asia (ex-Japan) compared with post 2015 average premium of 49 per cent.
Nomura India said valuation levels going back to 21 times on MSCI India should become an attractive point for investors to re-build positions in the market. Its India Equity strategy team’s end-2024 fair value index target for Nifty stands at 24,860, based on 20 times estimated 2025 EPS.
The recent FPI outflows triggered a selloff in domestic stocks, raising fears India as an preferred emerging market (EM) is in for a de-rating. FPI ownership in Indian listed space is quite substantial, and so is the risk.
Valuations do not matter, until they do. The recent rise in battered Chinese shares do suggest money has started chasing valuations. "While investors have been concerned about India’s valuations for some time, we think valuations will now increasingly become a factor should there be any slowdown in foreign and even domestic flows," said Nomura India.
FPIs held $929 billion worth domestic shares at last count. This is against $565 billion worth Korean shares they owned and $377 billion worth China A shares they held, as per latest holding patterns. In percentage terms, they held 18.9 per cent stake in Indian equities against just 4 per cent for China A, 17 per cent for Thailand equities and 15.6 per cent for Philippines stocks. FPI ownership in Korea (34.6 per cent) and Indonesia (27.1 per cent) is comparably high.
Foreign investors have been net sellers this past week, which was partly absorbed by local institutional investors, and partly by non-institutional net-buying. Indian mutual funds’ cash balances as at end of August 2024 were at an almost a five-year high, with cash balances to the tune of $22 billion.
This, Nomura said, suggests an ability to absorb some of these foreign outflows.
"However, we are concerned that any potential buying from such institutional investors going forward may slow or even disappear, as they may attempt to pre-empt each other. This issue may also be further exacerbated should local retail flows (into domestic equity funds) also suddenly slow. Some media articles also have started noting the relative attraction of China equities for domestic India investors, which we think could possibly sway the views of local investors," Nomura India said.
While China has pledged fiscal support, details are still lacking, and should China disappoint on announcement and execution, investors will likely be quick to pounce back into India equities, Nomura India said.
"While the market rally is encouraging, more policy steps are needed to boost economic activity and confidence in China. The average Chinese citizen still grapples with job insecurity, stagnant salaries, and depreciating real estate and equity values. The policies announced so far can only smooth out the de-leveraging process. The critical task of repairing balance sheets still lies ahead," said Viram Shah, CEO at Vested Finance.
Nomura India said any significant sell-down in India stocks might prove to be a buying opportunity. This is because India's structural story is still intact, and while India will likely see a cyclical slowdown ahead, it would not be a structural slowdown.
"India remains a large and liquid market with generally higher-quality companies, and we think India will continue to benefit from longer-term themes such as supply chain relocation, and a push toward investment led-growth," Nomura India said.
Nomura India said EM equity investors have been underweight India equities, and thus there is some buffer in the form of how much larger their underweights can go.
"If the recent rally in China equities becomes more self-sustaining amid a large fiscal stimulus, and should local investors in China (which so far have been largely out of the market bar the last couple of weeks) become far more involved, this may force even foreign investors to chase China equities higher. As that occurs (although it's not clear to us if this will be the case), India and other regional markets might see somewhat sustained underperformance," Nomura India said.
At present, MSCI India trades at forward PE of 24.1 times against a post-2015 average of 19.5 times after last week's pullback. India stocks still trades at 77 per cent premium to Asia (ex-Japan) compared with post 2015 average premium of 49 per cent.
Nomura India said valuation levels going back to 21 times on MSCI India should become an attractive point for investors to re-build positions in the market. Its India Equity strategy team’s end-2024 fair value index target for Nifty stands at 24,860, based on 20 times estimated 2025 EPS.