Mumbai: After a lean flow, foreign institutional investors (FIIs) are expected to return to Indian shores. According to Aditya Birla Sun Life mutual fund, as foreign foreign portfolio investor (FPI) outflows from emerging markets reverse in 2019, India should also see FPIs coming back.

“India and other EMs now offer favourable risk reward amid improving growth, supportive macros, healthy balance sheets, light investor positioning and reasonable valuations. Consequently, we will see a reversal of the FPI outflows that took place in 2018. In addition, domestic liquidity will sustain in India with SIP flows expected to remain steady," said Mahesh Patil, co-chief investment officer, Aditya Birla Sun Life AMC, at a press conference on Thursday.

With quantitative easing (QE) winding down, liquidity will be moderate and fund managers will be selective, he added.

FPI equity flows were negative in 2018 in emerging markets, including India, due to strong dollar and increasing yields in the US, lower rate hikes in emerging markets and high crude oil prices leading to widening effects of oil importing countries. Amid stock market volatility, FIIs saw a net outflow of $4.58 billion from India, the steepest sell-off in a decade. FIIs were net sellers in all major Asian markets, except China. In Asia, they sold the most in Japan, withdrawing $45.82 billion from equities in 2018 so far, as US assets became more attractive.

Higher interest rates tempt large foreign funds to move their money to the US, hurting emerging markets that faced the double whammy of a stronger dollar and high crude oil prices.

Meanwhile, Aditya Birla Sun Life AMC sees corporate profit improving with business adjusting to policy changes, domestic consumption remaining steady and macro fundamentals being in place.

It estimates earnings growth of 24% for the Nifty in 2019-20, albeit macro fundamentals remain stable. “The large-cap Nifty index valuation at 17-18 times one-year forward earnings multiple is 10% higher than the long-term average. However, considering the better earnings visibility, valuations are reasonable. An improving growth outlook ‘on the road to recovery’ will drive markets to scale new highs in 2019. We expect markets to deliver lower returns in 2019," according to Patil.

Key risks, he pointed out, were higher crude oil prices, escalation of trade war, a hard landing in China and political uncertainty due to general elections this year.

The Sensex and the Nifty gained 5.91% and 3.15%, respectively, in 2018 after a blockbuster year for equities last year. However, both the BSE mid-cap and BSE small-cap indices slipped to seven-year lows on concerns of steep valuations and regulatory measures. Among major markets, the Shanghai Stock Exchange Composite Index (down 24.59%) saw the steepest decline in 2018. The MSCI Emerging Markets and MSCI World indices slipped 16.90% and 11.06% in the year gone by.

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