Foreign investors go slow on Indian equities in July

Foreign institutional investors (FIIs) pumped around $388 million into Indian shares in July, the lowest since April, staying on the sidelines for signs of recovery in corporate earnings amid concerns over stretched valuations.

Global emerging markets equity fund managers also continued to cut their allocations to India even as emerging markets at large continued to receive strong inflows, EPFR said in a statement dated 27 July.

So far this year, India equity funds have attracted over $10 billion, but the average GEM (global emerging markets) fund allocation is currently at its lowest level since the early second quarter of 2015, the fund-flow tracker said.

EPFR fund flow data is a subset of the larger FII data available from National Securities Depository Ltd. (NSDL).

EPFR’s data mainly tracks mutual funds, exchange-traded funds, closed-end funds, variable annuity funds and insurancelinked funds. The flows reported by NSDL also include investments by hedge funds, proprietary desks and sovereign wealth funds.

“FIIs have been relatively overweight India. However, they were cautious before the quarterly earnings numbers, which were expected to be relatively muted ahead of the implementation of GST (The Goods & Services Tax),” said Rikesh Parikh, vice-president of equities at Motilal Oswal Financial Services Ltd.

“Post earnings, they are seen revising their stance, and pour in more money,” added Parikh. Others seemed to agree. “Most global EM funds remain overweight on India and we saw about $400 million of net buying from FIIs in July. High valuations have deterred huge buys. However, the overall view on India is positive, with many FIIs waiting for a correction to buy more of Indian equities,” said Pratik Gupta, head of equities, Deutsche Bank India Pvt. Ltd.

Corporate earnings growth in the June quarter has been sluggish, as de-stocking and discounts ahead of the implementation of GST hit profits.

Lack of matching earnings growth has pushed up valuations further. BSE’s Sensex trades at 18.82 times one-year forward earnings, compared to its fiveyear and 10-year historical average of 15.08 times and 14.96 times.