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Indian equities have outperformed its regional peers in the last four weeks, with the Nifty 50 index gaining 5.1 per cent vs the MSCI Asia ex Japan index returns of 3.6 per cent as India continues to attract good foreign flows into equities, and even domestic flows have improved in the last few months, said foreign brokerage firm Credit Suisse.
“We expect India’s valuation premium to remain at elevated levels as it offers one of the fastest growth in the region. Additionally, robust FPI inflows and improving corporate fundamentals like balance sheet health and ROEs also support the higher valuation premium,” a mid-month report from the Credit Suisse added.
Also read: India, Hong Kong, China bucked trend to fuel 4% FDI growth in Asia: UNCTAD
Foreign portfolio investors continued to increase exposure to Indian equities. After outflows in April, FPIs’ net purchase of equities in May and June so far was $2.3 billion, taking (year-to-date) YTD flows to $8.1 billion.
Profit-booking anticipated
In the next few weeks, the Indian market may remain susceptible to some profit-booking, especially from the FPIs. However, the outflows will be limited as India’s underlying fundamentals have strengthened and expectation of faster vaccination and opening up of the economy will keep buying interest high on corrections, the firm said in the report.
“We continue to remain positive on Indian equities and believe economy-facing sectors should be bought in this dip. In the near term, we may see some rotation towards defensives like FMCG and IT.”
Broad-based recovery
The brokerage further added, “We expect a broad-based recovery in India in the second half to support our cyclical bias and preference for mid-caps, albeit with a slightly lower conviction than earlier.”
Despite rally in mid-caps, the valuation premium against large-caps is still below the historical average, mainly due to sharp earnings upgrades, which provides comfort on mid-cap companies, it said and added: “In small caps, valuation froth is emerging and we turn cautious. Within sectors, we continue to prefer banks, industrials, chemicals and have started to turn positive FMCG as they may benefit from better monsoon and re-opening of the economy.”
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