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Foreign portfolio tap dries, almost

The June figure was almost 40 per cent lower than the month before.

, ET Bureau|
Updated: Aug 08, 2017, 08.55 AM IST
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The June figure was almost 40 per cent lower than the month before.
The June figure was almost 40 per cent lower than the month before.
Flows from foreign portfolio investors into India have slowed of late as rich valuations and delay in corporate earnings recovery have reduced their appetite for domestic stocks. July registered the second straight month of fall in foreign inflow into Indian markets to Rs 2,461 crore from Rs 3,940 crore in June.

The June figure was almost 40 per cent lower than the month before. So far in August, they have sold Rs 1,349 crore worth of shares. Overall, in the June quarter, markets such as Brazil, Taiwan, South Korea and Malaysia saw fall in FPI flows besides India.

"The main foreign worries over the Indian market are the relatively high valuation levels, the still mediocre corporate investment growth and, linked to this, the balance-sheet problems in the state-owned banks," said Maarten-Jan Bakkum, senior emerging markets strategist at NN Investment Partners which manages about $208 billion in assets.

Concerns over rising interest rates in the US and potential tapering of loose monetary policy by the European Central Bank have led to a slowdown of flows into all emerging markets, not just India, said Jorge Mariscal, emerging market chief investment officer, UBS Wealth Management.

Money managers believe there are some underlying risks that the India market is not factoring in like sluggish earnings growth.

"Consumer staples or even paint companies are showing almost zero volume growth but selling at 35-40 times forward earnings," said Florida-based Rajiv Jain, Chief Investment Officer at GQG Partners-a boutique investment management firm.

Some of the private sector banks are also growing in riskier areas like SME (small and medium enterprises), micro finance or unsecured consumer lending which may lead to higher NPL over time but valuations hardly incorporate that risk.

Foreign portfolio tap dries, almost

At a price-to-earnings ratio of 19.6 times based on earnings for the current financial year, Nifty is relatively expensive to emerging markets. The MSCI EM index is trading at 13.4 times. Sensex is up 21.2 per cent for the year.

This rally in benchmark is courtesy a few blue chip stocks, which have a significant index weightage. The broader market appears more stretched, with BSE's Midcap gauge soaring 29.7 per cent this year. Many of the stocks have doubled or trebled, defying fundamentals.

Bankable ideas are hard to come by in such a scenario. "The macro story for India continues to look great but finding single stock bottom-up ideas has become difficult," said Arbind Maheswari, head of equities sales trading at Bank of America Merrill Lynch.

A reversal in trend in the US dollar, which looks oversold in the short term, could put pressure on foreign flows into India, added Maheswari.

"We would not advise adding unnecessary risk to portfolios. One should stay invested in solid companies, which have shown their capabilities to deliver. These valuations don't give you much room for error," said Maheswari.
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