Mumbai: Global investors remain mos-tly upbeat about Indian equities, although some amount of funds have begun veering to-wards smaller emerging and frontier markets such as the Philippines and Pakistan on expectations of stronger returns, investment bankers and analysts said.

While the overall sentiment around emerging market (EM) investments remains subdued due to the impact of lower commodity prices on markets like Russia and Brazil, India remains among the top picks.

“We still think Asia is in a relatively better shape than other EMs. Many of the Asian markets are more manufacturing-oriented, so they will be less impacted by weak commodity prices. In fact, some of them, including India, could benefit from cheaper input costs," said Tai Hui, managing director, chief market strategist (Asia) at JP Morgan Asset Management Co., adding that the outlooks for India and China are relatively encouraging when compared to other Asian economies.

According to Bloomberg data, the Sensex trades at 16.48 times price to earnings (P/E) ratio, and is the third-most expensive market among prominent EMs after the Philippines and South Africa, where the respective benchmark indices trade at 19.64 times and 17.15 times respectively. China ranks next with its Shanghai Composite Index trading at 16.24 times 1-year forward earnings. MSCI EM Index trades at 11.85 times 1-year forward P/E.

“India is a market that we remain optimistic on despite a rather disappointing 2015 so far. The macroeconomic picture is actually more constructive than other EMs, as (the) growth cycle is turning up rather than slowing down," said Hui.

Early signs of recovery in urban demand are starting to show in the Indian economy with car and consumer packaged goods sales seeing an improvement. A recent logjam in Parliament, which has stalled economic reforms, however, has some analysts worried.

“The pace of economic reforms has been slow. The government’s lack of a majority in the Rajya Sabha has resulted in slow progress on the implementation of the GST (goods and services tax) and on amendments to land laws, which are seen as key to the reform momentum," said Herald van der Linde, head of equity strategy, Asia-Pacific, HSBC.

Linde feels that China is a more attractive market than India due to cheaper valuations and the headroom available to the Chinese government to revive the economy.

“As for India, I would say the valuations are not as attractive; the earnings estimates are still coming down," said Linde.

Overall, the MSCI EM Index is down 9.9% for the year to date, while the MSCI World Index is up 1.9%. The Sensex has gained a mere 0.2% in the same period.

While India and China remain the focus among larger emerging economies, smaller markets like the Philippines, Mexico, Pakistan and Vietnam are catching the attention of investors seeking higher returns.

“My favourite (EM) markets are the Philippines and Mexico. Both have relatively low macro imbalances, are not too sensitive to what happens in China... Their growth prospects are better than elsewhere," said Maarten Jan Bakkum, senior emerging markets strategist with NN Investment Partners.

“India is also an overweight, but a small one," Bakkum said in an email from The Hague, Netherlands.

Philippines Stock Exchange PSEi Index has risen 2.89% since the start of the year, while Mexican Bolsa IPC Index is up 2.06%. Other markets like Pakistan have also delivered strong returns with 11.76% gains.

For the year to date, the Pakistani rupee, down 1.3% and the Philippine peso, down 3.1%, are among the best performing currencies in the pack, while the Mexican peso shed 9.6%. In contrast, the dollar index has risen 7.02% so far this year.

“Among the biggest markets I am still overweight is India, but if you look at smaller markets too, I like Philippines, Pakistan and Vietnam even more," Hertta Alava, director of emerging market funds at FIM Asset Management Ltd, said in an email from Helsinki.

“In smaller markets, valuation is more attractive than in India. Hong Kong is also attractive after the sell-off, but volatility is likely to be high there. So, overall, Asia is looking good relative to rest of the EM," added Alava.

The broader sentiment towards EMs, however, remains subdued going by outflows from the funds focused on them.

“Fears that US interest rates will move higher in September and slumping commodity prices kept the pressure on EPFR Global-tracked emerging markets equity funds during early August," global fund-flow tracker EPFR Global said in a release on 5 August.

The US-based fund-flow tracker pointed that another $3.5 billion flowed out of EMs’ equity and commodities sector funds during the week.

Investors pulled cash out of this fund group for the fourth week running in the week to 5 August, with retail investors net redeemers for the eighth consecutive week and 26th time in the 31 weeks year to date, EPFR said.