Foreign portfolio investors have sold Indian equities worth $19 billion since October 2021 as surging crude oil prices and steep valuation has made them nervous, a recent note by Jefferies stated.
"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 buy-in on the structural India growth story," said the report.
The weak trend in Chinese equities has impacted the performance of emerging markets as an asset class, noted the brokerage. A potential policy reversal in China will revive Chinese markets and bring inflows into EM funds, which will be good news for India too, it added.
It believes India is a long-term structural story and will gain traction from several global funds that wish to increase India's exposure from a structural point of view.
In the last six months, the Indian indices have fallen around 7 percent with auto, pharma, realty and consumption stocks declining the most.
According to the note, while expected earnings cuts are inevitable, they will be largely visible in Autos, Staples, Durables, Cement, Pharma and Industrials – which account for about 35 percent of the market weight. Overall, it expects FY23 Nifty earnings growth to be around 15 percent.
"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 the 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," Jefferies stated.
At 19.3x, Nifty trades at 16 percent premium to the last 10-year average and around 70 percent premium to EM benchmark, around 30 percentage points (ppt) above average, it said.
"Also, with the 10-year yield moving up by 24 bps 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 note added.