MUMBAI: An extended pandemic-induced lockdown, believed to be among the harshest in the world, has been a key contributor in Indian markets' rapid decline as a preferred destination for fund managers investing across emerging markets( EMs), say experts.
In the last three months, benchmark equity index Sensex has declined a steep 18.8% compared with a 7.5% fall in MSCI Emerging Markets index, which captures stock performances of mid- and large-cap companies in 26 countries.
Foreign institutional investors (FIIs) have aggressively liquidated their holdings of Indian equities and bonds in one of the sharpest sell-offs so far this year. Total FII outflow from Indian markets so far in 2020 is estimated at $19 billion, highest in many years. Analysts told Mint, that while India’s measures to tackle economic slowdown may seem aggressive by the country’s own historical standards, it is still considerably less than what governments are doing in other EMs.
"India’s lockdown was arguably among the strictest in the world which was necessary to contain the spread of the virus,'' Shibani Sircar Kurian, senior vice president and head of equity research, Kotak Mahindra Asset Management Company said.
Sircar feels the current market outlook is evolving in nature and will likely remain volatile as the actual impact on the economy unfolds. Fund managers will keenly watch the pace of execution of economic measures announced and the impact on the real economy. Compared to global measures, experts feel that India has been extremely conservative.
"The direct and immediate fiscal stimulus is about 1% and the monetary measures, while aggressive by our own historical standards, are still less than that of the other markets,'' said Mihir Vora, director and chief investment officer, Max Life Insurance. "Thus, the economic recovery for India may probably be a longer-drawn process. The liquidity chasing assets will also be relatively lesser. This is one of the key reasons why India has underperformed from the March lows."
According to Mint’s Emerging Markets Tracker, which takes into account real activity indicators, such as the manufacturing purchasing managers’ index (PMI) and real GDP growth, and financial metrics, such as exchange rate movements and changes in stock market capitalisation, a sharp contraction in manufacturing and exports along with a subdued stock market, pulled India down in April. Only Turkey and Mexico fared worse than India among the countries considered in the tracker.
However, valuation wise, India is still expensive when compared to other emerging markets although the country's premium has fallen drastically.
At current levels, Sensex is at 17 times of its one-year forward earnings while MSCI EM is at 13.24 times. India’s premium over emerging markets has fallen to 28.39% from its peak of 67.53% in May last year.
"Basically, the momentum is missing in Indian markets despite RBI taking so many measures and recent rate cuts. Market yields have remained range bound notwithstanding all those policy measures reducing incentives for any fresh positioning. FIIs may also be watching the widening fiscal deficit," Mahendra Jajoo, head of fixed income, Mirae Investment Managers said.