Emerging market (EM) economies have borne the brunt of rising global economic uncertainty caused by interest rate hikes by central banks around the world. A natural consequence of a stronger US dollar is that foreign portfolio investors (FPIs) tend to shun EM equities for other options. An analysis by ICICI Securities Ltd showed that FPI outflows from India and other EM stock exchanges in September have declined so far in October.
However, the road ahead may not be as smooth. The US Federal Reserve is likely to maintain its aggressive monetary policy stance to tame the beast of inflation. The US central bank is also in quantitative hardening mode.
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Hitesh Jain, Principal Analyst, Yes Securities Ltd. said, “We expect foreign institutional investors (FIIs) to move to EM equities in the near term given the US Fed continuing to hike interest rates in December. will be unstable.”
The Bloomberg Emerging Markets Capital Flow Proxy Index shows that capital flows into EMs are still below the historical average.
EM currencies including the Indian Rupee have seen significant depreciation in the recent past, coupled with the strengthening of the US Dollar. Bleeding EM currencies make EM assets a less attractive investment option for foreigners. “Amid fears of a global slowdown, holding on to the US dollar appears to be an attractive bet on equities and bonds, giving continued strength to the greenback,” Jain said.
India is said to be in a better position than its Asian counterparts as it is expected to witness relatively higher economic growth. Along with improving the corporate earnings scenario, FII outflows from India should be halted.
Nishit Master, Portfolio Manager, Axis Securities Ltd. said, “India’s valuation is still at a premium, but should not be viewed in isolation and is supported by improved growth prospects and improved return on equity.”
Data from Bloomberg shows that at one-year forward price-to-earnings multiple, the MSCI India index is trading at 19.82x. This is higher than the multiples of the MSCI Asia Ex-Japan Index and the MSCI Emerging Markets Index.
Meanwhile, to convert EM outflows into inflows, either the US Fed will have to stop raising rates or the EM central banks, which are lagging behind the Fed, will have to opt for a faster rate hike. “We don’t see any of that in the near term,” Master said. Against this background, Master cautions that the short-term bias of EM FPI flows is to the downside.
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