Indian stock market valuation a concern, FDI flows likely to continue: HSBC

FDI in India is likely to pick up going ahead on the back of a strong rebound in growth, said Frederic Neumann, co-head of Asian economics research at HSBC

After a sharp run up from their March 2020 low, the valuation of Indian stock market has become a concern now, HSBC said in their Asian outlook conference for the second half of 2021. It maintains a ‘neutral’ rating on Indian equities, but expects foreign direct investment (FDI) to pick up pace going ahead as the economic recovery gathers steam.

“FDI in India is likely to pick up going ahead on the back of a strong rebound in growth. Any pullback in FDI, I think, will only be temporary. The government’s latest stimulus measures announced Monday are marginally positive. However, relative to the economic dislocation seen in India, the package is not very large. Given the pace of vaccination, India should get to herd immunity in the first half of 2022” said Frederic Neumann, co-head of Asian economics research at HSBC.

Most emerging markets (EMs) witnessed healthy flows for most part of FY21 as global central banks, especially the US Federal Reserve (US Fed), remained ‘accommodative’ and pushed liquidity to help revive economic growth. In this backdrop, foreign portfolio investors (FPI) invested across geographies and asset classes. India, too, got its share with FPIs investing a record Rs 2.74 trillion ($37 billion) during FY21 in the Indian markets – the most since FY13, when they had pumped in Rs 1.4 trillion ($25.8 billion), data show.

The S&P BSE Sensex and Nifty50 logged their best financial year performance in a decade and surged 68 per cent and 71 per cent, respectively in FY21. Earlier during FY10, the S&P BSE Sensex had surged 80.5 per cent, while the Nifty50 rallied 73.7 per cent. Meanwhile, foreign holding in the Indian equity market has shot up to 27.6 per cent, much above the long-term average of 19.6 per cent, a recent Nomura report said. FII’s increased their holding in metals, cement, coal/utilities, consumer durables and industrial sectors in the last few months, while cutting their position in media and real estate sectors.

Indian markets, according to Herald van der Linde, head of equity strategy for Asia Pacific at HSBC, are seen as an alternative to China. “Flows to China are usually fed out of India and vice versa. That said, the valuation of Indian stock market appears expensive now. Last year, India got a good share of flows from north Asian regions. Besides, Covid third wave still remains a risk for the country,” he said.

HSBC has pegged India's FY22 GDP growth at 8 per cent in fiscal 2021-22 (FY22) with the first half likely to be weak, led by both the direct and indirect cost of the second wave.

“But we remain positive about growth prospects in the second half, by which time a critical mass of the population will be vaccinated. At the current run-rate of 6.5 million jabs a day, about 55 per cent of the overall population is likely to be vaccinated by end-2021,” wrote Pranjul Bhandari, chief economist for India at HSBC in a co-authored note with Aayushi Chaudhary.