Foreign institutional investors (FIIs) might have taken out money from the Indian markets so far in the month of May, but they have also been slowly raising their stake in Sensex companies, which is now at an all-time high of 29 per cent, and 24 per cent for the overall market cap of India.
“FIIs continued to invest in India with March’2015 quarter witnessing FII flows of nearly $6bn. This was the 10th consecutive quarter of positive inflows from the FIIs,” BofA-ML said in a report.
“Though the FII flows have slowed down in Q2CY15, they are still positive QTD. Strong inflows from the FIIs over the last five years have resulted in an all-time high foreign ownership for Indian markets at 24% of the overall market cap of India,” added the report.
Although one of the key risks for the Indian markets is the all-time high overweight stance of India in global emerging market funds (GEMs). FIIs investments have climbed to a record high from 15 per cent of the total market cap recorded in March 2009.
According to the report, financials continue to remain the highest overweight (OW) sector for the FIIs (at 14.5% OW). On the other hand, IT is the most underweight (UW) sector for the FIIs (at 8.1% UW).
The S&P BSE Sensex managed to surge past its crucial psychological level of 28000 in trade on Friday, but the index is still down nearly 2000 points from its record high of 30,024.74.
Benchmark indices came under pressure in the past couple of months largely on concerns about poor corporate performance amid a sluggish economy, coupled with fears related to a weak monsoon and other emerging markets looking more attractive. They have all weighed on the sentiment.
Some of the foreign brokerage firms have even slashed their year-end target for the benchmark indices, but say that the long-term view still remains intact. India is still one of the top investment destinations.
“Despite the recent pull back, outlook towards India for clients (FIIs) in the US is still incredibly optimistic,” says Shiv Puri, Founder and Managing Director, TVF Capital Advisors.
“For the short term, people are concerned, but the long-term outlook is remained optimistic and there is a greater understanding of the Indian market today where basically people want to focus on companies in the financial services sector,” he adds.
Citigroup has reduced the Sensex target to 32,000 from 33,000 for December. UBS cut the Nifty target to 9,200 from 9,600 and HSBC reduced the Sensex target to 26,900 from 30,100 by the year-end.
BofA-ML in a report mentioned that earning downgrades will continue for the next few months before stabilizing, which will keep the markets subdued in the near term. However, the investment bank expects FY16 consensus growth estimates of 18% to get downgraded to 12% to 13% growth.
Their year-end target of 33,000 for the Sensex is based on 17x 1-year forward PE, which is marginally below the 1 SD of the long-term average, said the report.