Foreign portfolio investors (FPIs) may have infused Rs 31,600 crore worth of dollars into domestic equities in November so far, their preference may soon tilt towards China and Korea stocks, given the recent underperformance and attractive valuations of the two peer markets.
To be sure, India remains the most expensive market in the Asia and the emerging market region. Indian stocks are trading at elevated PE valuation premium of 80 per cent against the MSCI AC Asia Pacific index. This is nearly 2.5 times the long-term average premium of 30 per cent and 60 per cent premium over region, excluding China.
India's recent outperformance, analysts said, has been driven to a significant extent by the underperformance of China, Korea and Taiwan markets. BNP Paribas feels that if a twin pivot materialises — FOMC pivoting to a less hawkish policy stance and China toward post-Covid reopening — the consequent outperformance of North Asia could derail India’s. BNP Paribas said while domestic investors are not too worried about the market’s relative performance, the are concerned about foreign flows potentially reverting to North Asia.
"Not only is India at a record-high valuation premium to Asia, all Indian sectors barring healthcare appear more expensive than the Asian average. Concerns about foreign flows declining after a recent recovery, driven by accelerated quantitative tightening are also a widespread angst. Some investors seem worried about potential tax levies or an increase in LTCG rates, in case targeted consumption subsidies to the poorer sections are provided as the general elections of 2024 draw near," it said on Friday.
Earlier, BoFA ML's November fund manager survey suggested that the country allocation, on a 12-month view, tilted significantly in favour of China (up 12 percentage points against October levels) and South Korea (up 15 percentage points) at the expense of India (down 13 percentage points) and Taiwan (down 11 percentage points).
Goldman Sachs said Indian equities are less likely to outperform for the third successive year in 2023, as it feels that China and other globally cyclical North Asian markets, notably Korea, could perform better on China reopening catalysts and global recovery expectations in 2024. While the brokerage remained bullish on India’s long-term prospects, high starting valuations and near-term cyclical considerations prompted it to give India a 'marketweight stance' last week.
MSCI India traded at 22 times forward PE, which is 30 per cent above its long-term average of 16.7 times since 2004 and at 85 per cent percentile of its valuation range over the past decade.
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