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Foreign portfolio investors (FPIs) have sold Indian equities worth $19 billion since October 2021 as rising prices of crude oil and steep valuation of the markets made them jittery, although there’s a buy-in on the structural India growth story, said a recent note by Jefferies, which met with around 50 fund houses across Singapore and Europe.

Since October, FPIs have broadly reduced India weightings by 50-100 bps. The outflow has primarily been due to valuation concerns. Most investors were surprised with the market resilience despite oil worries and ensuing twin deficit concerns.

According to the report, investors have four other key concerns. While expected earnings cuts are on their minds, the same is largely visible in six sectors (autos, staples, durables, cement, pharma and industrials) which account for about 35% of the market weight.

Secondly, several investors continue to worry that with the rising interest rates and property market recovery, retail investor flow into equity markets will reduce.

Thirdly, the impending LIC IPO will likely to drain some liquidity from the equity markets, and fourthly, weak demand trend from rural India will weigh on broader economic growth. However, the report said the expected pick-up in construction activities will likely to improve remittances, which, in turn, will improve rural demand.

India has held up well despite FPI selling. A potential policy reversal in China will revive the Chinese markets and bring inflows into EM funds, which will be good news for India as well. India, as a long-term structural story, is gaining traction, and several global funds wish to increase their India exposure from a structural point of view, Jerreries said.

The report said investors scrutinise the relationship between India and Russia, and some of them are concerned that India’s neutral stance at the UNGA is not going well with the West and may lead to adverse inverse sentiments, if not contained.

Several investors had a structural bullish argument on crude oil, which, if realised, creates a sustained current account issue for India.

At 19.3x, the Nifty trades at 16% premium to the last 10-year average and ~70% premium to EM benchmark, ~30 ppt above average. Also, with the 10-year yield moving up since the last policy, the yield gap has risen, which is in an uncomfortable zone, implying unfavourable risk reward.

Jefferies’ Nifty target for December 2022 at 17,500 implies a sideways movement due to valuation concerns.

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Author: Howard Caldwell