FIIs sell Indian shares worth $12.8B this year: Here's why
What's the story
Foreign institutional investors (FIIs) have offloaded Indian shares worth $12.8 billion this year. The trend indicates a preference for markets like South Korea and Taiwan, which are seen as more favorable in terms of risk-reward ratios. Despite India's stable macroeconomic environment, the country's earnings momentum has been lagging behind, resulting in reduced fund flows into the market.
Market performance
Shift in FII investments
Elara Capital has noted that FIIs are moving their investments from Indian stocks to other emerging markets such as South Korea, Taiwan, and China. These markets offer better growth prospects due to favorable conditions, earnings upgrades, and lower valuations. The Nifty index's year-on-year USD earnings per share (EPS) growth was only 4%, putting it in the mid-to-bottom quartile of global markets.
Valuation concerns
India's valuation v/s earnings growth
Elara Capital further points out that India trades at a forward price-to-earnings ratio (P/E) of 19.4x (2FY), well above its long-term average of 17.1x, and the MSCI EM's forward P/E of 12.6x. Even with a top-tier return on equity (ROE) of 14.4% among emerging markets and Asian peers, India's profitability doesn't fully compensate for the disconnect between the high valuations and subdued earnings growth.
Earnings estimates
Earnings estimates and trade tariff impact
Over the last three months, the consensus earnings estimate for India has declined by 1.8%. In contrast, China's estimate witnessed a +3.7% upward revision and MSCI EM posted a modest +0.2% increase. The US trade tariff overhang has also added to market uncertainty and contributed to the rotation out of Indian equities.
Market revival
Potential return of FIIs
Analysts believe that improved earnings delivery is key for FIIs to return. If the USD EPS compound annual growth rate (CAGR) picks up to 12-14% in the coming years, driven by upward revisions in value-aligned sectors like Financials, Staples, Discretionary, and Infrastructure, FIIs could become net buyers despite India's relative richness. G Chokkalingam of India Inc also expects that earnings improvement from October-December quarter could lure FIIs back into the market.
External influences
Factors influencing foreign investor sentiment
Amar Ranu of Anand Rathi Shares and Stock Brokers emphasized that a mix of stronger earnings growth, attractive valuations, and stable macroeconomic policies will be crucial in reviving foreign investor interest in Indian equities. On the external front, a softer US Federal Reserve stance and weaker dollar could make Indian assets more appealing. However, any heightened geopolitical risks or fresh tariff measures could dampen sentiment.