US investors showing renewed interest in India: BoA ML

US investor outlook towards the Indian market has undergone a sea change following the spurt of reforms announced by the government and post the latest round of quantitative easing (QE3) by the Federal Reserve (Fed).

Foreign broking firm Bank of America Merrill Lynch (BoA ML) after a 10-day investor road show in the US concluded that reforms have revived interest in India.

“Clients sensed a change in the political environment in India and some investors, who earlier were staying away from India, were keen to meet and understand the shape of things to come,” said Jyotivardhan Jaipuria, head of research at BoA ML in a report.

Jaipuria, who was part of the roadshow, however felt that buying interest from US investors was relatively muted compared to Asian investors.

“They thought the markets had run up too fast and preferred to wait for a correction,” he said in the report.

“While everyone appreciated the reforms were a big step, the general feeling (among US investors) was that much more would need to be done before we could see the economy reviving,” he added.

Recently, the Indian government, despite stiff opposition from key allies and opposition, opened up sectors like retail and aviation for foreign direct investment. The centre also increased diesel prices and introduced a cap on the use of LPG cylinders to rein in fiscal deficit. This coupled with stimulus programmes announced by the US Federal Reserve and European Central Bank (ECB) have sparked a risky assets like India.

Benchmark Indian equities have rallied rallied more than 7% and the domestic currency has appreciated about 5% against the US dollar since September 6. Meanwhile, foreign institutional investors (FIIs) have invested nearly $3.5 billion into Indian stocks since the start of this month.

Jaipuria said that most investors in the US showed inclination towards investing in rate sensitive and high-beta sectors in India. He added that inflation was once again the focus as QE3 has raised the possibility of a spike in crude prices.

Common questions asked by US investors

• What are the future reforms and how soon can we see them coming?
• What are the chances of a roll-back of current measures?
• What will it take to get the investment cycle kicking in India?
• What are the chances of a rate cut soon?
• How soon can the earnings cycle change? Have margins bottomed out?

Source: BofA Merrill Lynch