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'Expensive’ India records worst Feb sell-off with volatility surge

The global rout resulted in India becoming one of worst performers among major emerging markets.

, ET Bureau|
Updated: Mar 01, 2018, 08.18 AM IST
Globally markets have been jittery and we have seen a fair bit of volatility
MUMBAI: Foreign investors pulled Rs 12,500 crore out of Indian equity markets in February as the rout in global equities triggered by surge in US bond yields and sky-high valuations back home took a toll on sentiment. The sell-off marked the worst ever February in terms of outflows by foreign investors.

India is also among the markets which have seen the worst of the outflows within the emerging markets space this month. In dollar terms, India saw outflows to the tune of about $1.5 billion from foreign portfolio investors in February (till Tuesday), the third highest after Taiwan ($3.5 billion) and South Korea ($2.6 billion), Bloomberg data showed. FPI flows data for China and Singapore were not available.

“Globally markets have been jittery and we have seen a fair bit of volatility. News flow out of India has not been great too with bond yields spiking and some credit issues coming up in the banking system,” said Bharat Iyer, Mumbai-based head of India equity research at JP Morgan.

The global rout also resulted in India becoming one of the worst performers among major emerging markets. Benchmarks Sensex and Nifty fell 4.8 per cent each in February, the fourth highest after Hong Kong’s Hang Seng index, South Korea’s Kospi index and China’s Shanghai Composite index which fell 5.4-5.5 per cent in February. But for the domestic institutional purchases to the tune of Rs 17,800 crore in February, the fall in the market would have been much sharper India’s own issue of banking fraud at Punjab National Bank, introduction of long-term capital gains tax on equity in the Union Budget on February 1 also weighed on sentiment.

There was also a fear of reduction in India’s weightage in MSCI weightage after the index provider called India’s move to stop providing data to foreign exchanges as ‘anti-competitive’. Prior to these events also, there were risks pertaining to higher oil prices, higher inflation and widening fiscal deficit besides disappointment over delayed recovery in earnings.

Overseas money managers believe that India’s high valuation exacerbated the outflows. The Nifty is trading at 17.3 times on a one-year forward earnings basis compared to MSCI Emerging Markets index which is trading at 11.6 times. “India was looking somewhat expensive within the emerging markets universe, which could have encouraged larger outflows from India perhaps,” said Geoff Lewis, Hong Kong-based global market strategist with Capital Markets Group of Manulife Asset Management.

Mark Matthews, Singapore-based head of research-Asia at Julius Baer also sees political risks ahead. “In the run-up to elections next year we may see more populist measures being doled out, especially after the result of Rajasthan bi-election and in the Madhya Pradesh by-polls Congress appears ahead,” said Matthews.

“Some investors are also starting to question the basic assumption that the election next year will see as large an incumbent majority as they had assumed,” added Matthews.

As with elections historically, the months ahead are likely to see elevated volatility levels, said money managers. However, the broad interest in emerging markets may ensure that foreign investors don’t stay away from the Indian market. “From a near term perspective, markets could remain volatile for another month or so. But for the year, we are positive on flows into emerging markets because of the growth differential versus developed markets,” said Iyer of JP Morgan.

sanam rey--snip

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