Fears of an economic slowdown have raised hopes that central banks will dial back or halt rate hikes to avert a slowdown. US Fed officials indicated in the minutes of their July meeting released last week that they would take a less aggressive stance if inflation begins to ease.
According to stock exchange data, foreigners have invested $6.4 billion in Indian equities since the beginning of July, after dumping more than $27 billion in the past six months.
Domestic investors bought shares worth over $30 billion in the first half, supporting the market. But this month, foreign investors pumped in more than $5 billion on hopes that Indian companies will provide strong earnings and that the fall in crude oil prices will help narrow the country’s current account deficit.
Analysts expect some respite for the rupee from foreign inflows into Indian equity and bond markets after depreciating over 6.7 per cent against the dollar this year.
Since mid-June, India’s major stock index has risen 11.5%, which compares with the MSCI World Index’s gain of 6% and the MSCI Emerging Markets Index’s 2.8% decline.
Neha Pathak said, “Foreigners clearly underestimated how India will deal with the pandemic and the economic recovery post-pandemic has been strong in an uncertain global environment.”
Investment Specialist for India Equities
“With well-developed and strong equity markets that have delivered great returns, it would be difficult for any global investor to ignore Indian equities.”
Despite the weak earnings performance in the June quarter, several companies have expressed confidence that the fall in commodity prices will strengthen their margins in the coming quarters.
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And recent reports suggest that a fall in commodity prices from red-hot levels will help improve margins in the coming quarters.
Aishwarya Dadhich, fund manager, Ambit Asset Management, said strong earnings growth and moderation in inflation would strengthen the Indian stock market.
“Earnings growth is going to be much better than other emerging markets. Hence, the deep cut in FII (foreign institutional investors) ownership will reverse from here.”
According to Refinitiv data, net profit of India’s large and mid-cap companies is expected to grow 18.9% in 2023, the highest in Asia.
Some foreign fund managers are also diverting money from China, where stocks have been hit by the economic slowdown, the fresh COVID-19 flare-up and the asset sector crisis.
According to a BofA Global Research report, allocation to emerging market funds in India increased to 19.7% in July from 18.1% in June, while allocation to China declined to 36.2% from 39.4%.
HSBC Research Analyst Amit Sachdeva said that given the growth challenges in China and the rest of the world, India stands with better earnings and GDP expectations.
Rupee has recently outperformed some of its emerging market counterparts. The rupee has fallen just 0.03% in the past one month, while China’s yuan, South African rand and Malaysia’s ringgit have fallen 1.43%, 0.92% and 0.74% respectively.
Morgan Stanley expects Asian economies such as India and Indonesia, which are focused on domestic demand, to be more resilient than those dependent on exports, as slower demand from developed countries affects shipments.
“We remain constructive on India, Indonesia and the Philippines as they are well positioned to generate domestic demand alpha,” the brokerage said.
domestic investment fell
At the same time, domestic investors in India reduced their positions in August, lured by a hike in bank deposit rates, which provides them with risk-free funds.
The data shows that domestic investors have sold $773 million in Indian equities so far this month.
However, some analysts say the slowdown in domestic investment could be just a setback. According to the BofA report, household investments through systematic investment plans (SIPs), in which investors put money every month, remain strong. Monthly inflows increased to over $1.5 billion over the past 10 months.
Dadhich of Ambit Asset Management said, “Domestic investors may cut some positions. They have been buyers at all levels this year.
“Their sales won’t adversely affect the market because they won’t go crazy selling.”