FII flows ease in September but India still stands out in EM pack

MUMBAI: The slowdown in foreign institutional investor (FII) flows in September prompted critics to raise red flags over Indian stock market valuations. But optimists may take comfort from the fact that domestic equities continued to attract FII flows in September even as many other emerging markets witnessed outflows.

Brokers are not certain if India can maintain this edge for long as concerns over interest rate hikes in the US may prompt various fund managers to trim exposure to emerging markets like India. India managed to draw FII flows worth $848 million in September while these investors sold in other emerging markets such as Taiwan, South Korea, Indonesia and the Philippines. But the flows into India in September are the lowest since February.

Overseas fund managers justified the continued purchases of Indian stocks on hopes of better prospects. “India is much better off than most of its emerging market peers. We believe that India is now much better protected in absolute and relative terms from the 'great emerging market unwind',” said Jonathan Garner, chief Asia and global emerging market equity strategist at Morgan Stanley.

BSE’s Sensex has risen 24% this year, the most among top 10 global markets, sparking concerns that valuations might be stretched. The index is trading about 16.1 times to its one-year forward estimated earnings while China’s Shanghai Composite Index is trading at 9.9 times, Brazil's Ibovespa Index 11.8 times and Russia’s MICEX 5.1 times.

Some foreign investors are also assessing India on the basis of historical valuations. “Nifty commands 16 times forward price to earnings (P/E) multiple, but this is still a far cry from the almost 18 times multiple after the 2009 elections. Hence, index valuation is not extremely stretched by historical comparison. Foreign investors enter market as long as underlying profit growth is clearly visible and that is there in India,” said Hartmut Issel, head chief investment officer-research at UBS.

But the country’s share valuations may start becoming a concern once the global market starts worrying about rising rates in the US. Brokers and analysts said investors would then probably look to cut exposure to markets which are expensive.