Indian stock market remains world's priciest despite recent correction

The ongoing FPI selling activity can present a unique opportunity to Indian investors, as they are not as heavily influenced by the dollar index and US bond yield considerations

File photo of the Bombay Stock Exchange building in Mumbai (Photo by Indranil Aditya/NurPhoto via Getty Images)
File photo of the Bombay Stock Exchange building in Mumbai (Photo by Indranil Aditya/NurPhoto via Getty Images)

Aditya Anand

Despite a recent market correction, India's benchmark index, the Nifty, continues to trade at around 20 times FY 24 earnings, retaining its status as the most expensive market in the world, according to V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services. As Foreign Portfolio Investors (FPIs) extend their selling spree into September, concerns about elevated valuations and attractive US bond yields dominate market sentiment.

FPIs, or Foreign Portfolio Investors, are institutional or individual investors from foreign countries who invest in financial assets within a different country, such as stocks, bonds, and other securities. FPIs play a significant role in global financial markets and can have a substantial impact on the host country's economy. FPI selling can indicate a combination of factors, including market sentiment, economic and political conditions, currency risks, global trends, and specific portfolio strategies. It's essential to analyze the context and underlying reasons for FPI selling to understand its implications for a particular market.

FPI selling, which commenced earlier this month, has persisted through the week ended 22 September, with foreign investors turning sellers in eleven out of 15 trading days in September. Data from the National Securities Depository Limited (NSDL) reveals that FPIs have offloaded Indian equities worth Rs 10,164 crore this month, encompassing bulk deals and primary market investments. In the cash market, FII selling has amounted to Rs 18,260 crore thus far in September. The FPI pullout is primarily due to rising US interest rates, recessionary fears, and overvalued domestic stocks.

Vijayakumar noted, “Since valuations remain high even after the recent pullback and US bond yields are attractive (the US 10-year bond yield is around 4.49 per cent), FIIs are likely to continue selling as long as this trend persists. It would be irrational to expect FIIs to buy aggressively when the US 10-year bond yield is around 4.49 per cent and the dollar index is above 105.”

Despite the lofty valuations, he also pointed out that India boasts the best growth and earnings prospects among major global economies. Consequently, if the markets correct further, say by 3 to 4 per cent, FIIs may turn into buyers even if US bond yields remain high.

For domestic investors, the ongoing FII selling activity can present a unique opportunity, as they are not as heavily influenced by the dollar index and US bond yield considerations. High-quality stocks in sectors such as banking and capital goods, which have declined, could be acquired for potentially substantial long-term gains.

Vijayakumar added, "In September, even as FIIs have been selling in the market, they have been significant buyers in financials and capital goods." As the Indian stock market navigates these turbulent waters, investors are closely monitoring global economic factors and the potential for further market corrections in the coming weeks.

Mayank Mehra, the manager and principal partner at Craving Alpha, believes that the potential for robust economic growth, appealing valuations, and ongoing government reforms may bolster foreign investment inflows in the upcoming month.

According to the data with depositories, in the 15 trading days so far in September, FPIs were sellers in 11 days with a net withdrawal of Rs 10,164 crore. This figure includes bulk deals and investments through the primary market. Of the total pullout of Rs 10,164 crore this month (till September 22), over Rs 4,700 crore was withdrawn in the last week alone.

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