FIIs have invested a net of $1.1 billion in Indian shares in July, after pumping in $2.5 billion and $1.7 billion in June and May, respectively as easy central bank policies have ensured a gush of liquidity, pushing the markets around the world higher.
“Over the past several weeks, we have further raised our overweight exposure on the Indian market on account of improving corporate fundamentals, particularly tied to Infosys and Reliance, which carry a large weightage in the Indian index,” said Darshan Bhatt, co-founder and deputy CIO at Glovista Investments LLC.
“Despite the pandemic’s continued impact on the Indian economy and society, the quality and growth orientation of the Indian bourse’s largest constituents continue to strengthen,” Bhatt said in an e-mail from New Jersey, United States.
“We expect the magnitude of the favourable developments impacting the Indian market more than the adverse short-term investor sentiment towards Indian assets on account of the virus’ continued relevance in the country,” he added.
Bhatt prefers largecap companies in India, particularly in the healthcare, banking and technology sectors.
Benchmark Sensex has risen 47 per cent from its lows seen in March, and the liquidity has ensured the uptrend continues. Investors have ignored the relentless rise in Covid-19 infections which are now above 20 lakhs.
Bhatt said that strong earnings from HDFC Bank, SBI, Infosys and Reliance’s focus towards growth sectors have helped the Indian index.
Rahul Chadha, CIO, Mirae Asset Global Investment in Hong Kong does not believe there is froth building up in the Indian markets with the recent rally.
“I do not think there is frothiness in India,” Chadha said in an interaction with ET Now, adding that if you look at foreign ownership it is the lowest overweight in 10 years.
“So from a technical perspective Indian market is well-positioned and as people get confidence on economic recovery and economic data holding on despite Covid cases increasing, you will see more flows come into the country,” said Chadha who manages asset worth Rs 40,998 crore.
Corporate earnings in India, though hit by the Covid-19 pandemic and subsequent lockdowns, have turned out to be better than expected, fuelling expectations that a recovery in earnings and the economy may be closer than earlier perceived.
In a report on August 4, Motilal Oswal said June quarter earnings of 91 companies in its coverage universe and 33 Nifty companies that had announced their results came in above expectations.
The listed companies seem to have weathered the Covid-19 crisis better than their smaller and unlisted counterparts, as they have the wherewithal to cushion the blow better.
“We have seen in India and other countries that on average earnings have surprised positively,” said Hertta Alava, Senior Strategist at Nordea in Helsinki, Finland.
“I think one reason is that the effects of the lockdown were most negative to smaller companies and listed companies survived better. Big companies have better access to funding and better tools for working from home. They might have also gained market share from smaller competitors,” she added.
Alava expects modest upside for Indian markets and said the main risks are further problems in the banking sector and if a new major lockdown is announced to curtail the spread of second wave coronavirus.
While the country is gradually relaxing the lockdown norms, regional lockdowns have propped up new challenges for business operations and economic recovery in the respective areas.
Alava is upbeat on IT stocks in India.
“I think IT looks still attractive despite good performance. Fundamentals are solid and main risk would be sector rotation,” she said.
Some analysts, however, did not share this optimistic view on Indian equities and believed there wasn’t a case for investing in India at this point in time.
“Our positioning in the Indian market remains rather cautious. The still high Covid-19 infection growth will make it difficult to have a V-shaped economic recovery like we have been seeing in east Asia,” said Maarten-Jan Bakkum, senior emerging markets strategist at NN Investment Partners.
According to Bakkum, the negative growth picture will make it more difficult for policymakers to solve financial system weaknesses, which in his view is the single-most-important headwind to growth in the medium term.
For the rest of 2020, Bakkum believes Indian equities will likely struggle to keep up with the global emerging markets index, as the policy response to the corona crisis is likely to remain less effective than in other countries, particularly in east Asia.
“This is due to the bad debts problem in the financial system and the limited fiscal room to solve these problems in the short term,” he added.