BackIndia loses premium tag to emerging markets, may take time to recover
Foreign portfolio investors (FPIs) have always been attracted to the relatively faster growth offered by the Indian economyHowever, that sentiment is coming undone in the recent covid-19 induced sell-off
PremiumThe higher they rise, the harder they fall. The higher premium commanded by the Indian market compared to other emerging markets has come crashing down in a recent correction. At the beginning of the year, the MSCI India Index traded at a premium of about 45% to the MSCI Emerging Markets Index, using the one-year forward price-earnings multiple. It now trades at a 24% premium.
Foreign portfolio investors (FPIs) have always been attracted to the relatively faster growth offered by the Indian economy. However, that sentiment is coming undone in the recent covid-19 induced sell-off.
The sharp fall in MSCI India valuations comes on the back of huge withdrawals of foreign funds from the Indian market. Year till date, FPIs have been net sellers of equities worth ₹46,058 crore. Domestic institutions have been heavy buyers during the same period, else the correction would have been worse.
A fall in banking stocks particularly hit the market in the last one month, with the Nifty Bank index undershooting the broader markets. Investors worry that the country-wide lockdown will slow the economy significantly and the recovery after the lockdown may be sluggish as well.
This is in stark contrast to expectations of a relatively faster pace of earnings growth in the subcontinent before the lockdown. As such, a return to the days of high premiums may be a long time away.
Another factor that will impact growth is the status quo in the weight of the Indian market in MSCI Emerging Markets Index. India has a weight of 9.16% in the EM index , while China, South Korea and Taiwan are at 33%, 13% and 11.4%, respectively. MSCI has postponed the rejig of the index, which could have seen an increase in flows to the domestic market.
In fact, in December when the government raised foreign investment limits, there were expectations that India could get an additional $2.5 billion inflow into the equity market. “Using the current list of constituents, we expect MSCI India’s weight to rise by about 70bps in the semi-annual index review of May 2020, implying passive flows of US$2.5bn," Morgan Stanley India had said in a note in December 2019.
Some stocks, such as Kotak Mahindra Bank Ltd, United Breweries Ltd,and Biocon Ltd, were expected to be included in the MSCI India. Now analysts reckon that global investors are looking at stocks with better yields. On that score, Morgan Stanley India had also flagged firms such as NTPC Ltd, Power Grid Corp. of India Ltd, Hindustan Petroleum Corp. Ltd, REC Ltd and Container Corporation of India Ltd as potential candidates for the list. When the next rejig is due, the actual additions will be interesting to watch.
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