India attracts biggest share of foreign flows

Improving economic and earnings outlook, buoyancy in primary market will help India sustain the momentum next year

India has garnered the biggest share of foreign flows into emerging markets (EM) in 2017 after a gap of two years. In the past two years, the domestic markets had lost out to others, such as South Korea and Taiwan, as these markets were able to demonstrate better earnings growth. 

The improving earnings and economic outlook has titled the scales back in favour of Indian equities this year. Large-scale issuances on the primary market side have also helped India attract higher overseas capital. 

According to Bloomberg data, overseas funds net purchased equities worth $8.2 billion from Indian markets, roughly half of the inflows received by all the key emerging markets (EMs) put together. The combined EM flows excludes China and Russia as data for these two countries is not publicly available. In terms of percentage of flows, India’s share in the pie for 2017 is the largest in five years.

Strong inflows from overseas funds coupled with good buying by home-grown mutual funds have helped Indian markets scale new heights during 2017. The benchmark Sensex has climbed 34 per cent in dollar terms during 2017 to become one of the best performing global markets. 

Experts believe India could sustain the momentum in terms of foreign flows. The key triggers being the economy returning to 8 per cent-plus growth trajectory. Corporate earnings are projected to hit high double-digit for next two fiscal years. Strong IPO and other fundraising pipeline will also help attract overseas flows. 

“India is our number one pick in the EM. It’s got a cyclical and structured recovery underway. I think next year, the market will start to appreciate. Not only this is a growth upswing, but they are also going to realise this is not the old boom-bust cycle; this is more like a mature economy, which can actually deliver long-lasting growth,” said Robert Subbaraman, managing director, Nomura.

Nomura and other foreign brokerages, including Goldman Sachs and Credit Suisse, are expecting 10-15 per cent growth in the Indian equities for next year.

In terms of IPOs, 2017 has been the best year with issuances worth more than $11 billion. The forecast for new issuances for 2018 is in the range of $8 to $10 billion.

“The strong FII inflows seen in November were primarily on account of large insurance IPOs. We believe more such large companies will launch IPOs next year as well. This will give an opportunity for long strategic investors to participate,” said Neelkanth Mishra, India equity strategist, Credit Suisse.

Global liquidity is another key aspect for flows into EM to sustain. Currently, liquidity conditions remain benign. Even though the US Federal Reserve has embarked on the gradual path of hiking interest rates and tapering its balance sheet, the European Central Bank (ECB) and the Bank of Japan (BoJ) have loose monetary stance. 

“The combined balance sheets of developed markets won’t shrink. The central banks are just taking the foot off the accelerator, but they are not yet applying the brakes,” said Mishra. 

Many experts say foreign flow outlook will remain strong at least in the first half of 2018. The stance might tighten going into the second half.

“We should be worried about EMs, when they start applying the brakes,” he added.