Valuations, sharp rise in oil made FPIs nervous since October: Jefferies

Foreign portfolio investors have sold Indian equities to the tune of $19 billion since October 2021 as rising crude oil prices and steep valuation of the markets made them nervous, said a recent note by Jefferies who met with nearly 50 fund houses across Singapore and Europe.

"India positioning has come down to neutral/slight overweight level; implying 50-100 basis points (bps) weight reduction on India over the last 3-6 months. Premium valuation still remains the key discomfort along with higher oil; although there's a buy-in on the structural India growth story," wrote Mahesh Nandurkar, managing director at Jefferies in a report co-authored with Abhinav Sinha.

Among sectors, property, auto and banks were discussed the most, while some incremental interest in staples as well due to rising food inflation, the note said.

As an asset class, weak trend in Chinese equities has impacted the performance of emerging markets, Jefferies said. A potential policy reversal in China, Jefferies said, will revive Chinese markets and bring inflows into EM funds, which will be good news for India too. India as a long-term structural story, Jefferies believes, is gaining traction and several global funds who wish to increase India exposure from a structural point of view.

In the last six months, the S&P BSE Sensex and the Nifty have slumped around 7 per cent each as foreign investors dumped Indian stocks across the board. Auto, pharma, realty and consumption-related stocks suffered the most with their respective indices slipping 5 per cent to 15 per cent during this period, data show.

While expected earnings cuts are on the minds of investors, the same is largely visible in 6 sectors – Autos, Staples, Durables, Cement, Pharma and Industrials – which account for about 35 per cent of the market weight, Jefferies note said.

"Overall, we still expect FY23 Nifty earnings growth to be around 15 per cent. Several investors continue to worry that with the rising interest rates and property market recovery, retail investor flow into equity markets will reduce. The impending LIC IPO will likely drain some liquidity from the equity markets and weak demand trend from rural India will weigh on broader economic growth. We believe that the expected pick-up in construction activities will likely improve the remittances which in turn will improve rural demand," Nandurkar and Sinha said.

At 19.3x, Nifty, according to the note, trades at 16 per cent premium to the last 10-year average and around 70 per cent premium to EM benchmark, around 30 percentage points (ppt) above average.

"Also, with the 10-year yield moving up by 24bps since the last policy, the yield gap has risen to 196 bps which is in an uncomfortable zone, implying unfavourable risk reward. Our December 2022 Nifty target at 17,500 implies a sideways movement due to the valuation concerns," the Jefferies note said.


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