Election jitters make EM funds steer clear of Indian equities

MUMBAI: Indian equities’ underperformance to their emerging market peers so far this year may continue for a while, given the uncertainty related to the looming general elections, and as other markets turn more lucrative in comparison.While India’s equity benchmark Sensex has posted gains of mere 0.18 per cent for the year to date, and Nifty has dipped 0.63 per cent, their peers have outperformed smartly. China’s Shanghai Composite index, Russia’s RTS index, and Brazil’s Bovespa index have risen 9.11 per cent, 12.92 per cent and 9.42 per cent, respectively.“India is a lower beta EM (emerging market). When overall EM flows are large, India will lag other EMs,” Krishna Memani, chief investment officer at the New Jersey-based OppenheimerFunds, said in an email from the US.“While we find some good companies in India, overall there are better opportunities in other EMs. A combination of higher valuation, political risk and muddled monetary and fiscal policies make India more challenging,” added Memani.The upcoming general election is a key event looming over the market. The noise ahead of the event suggests the chances of a clear victory for a party at the Centre may be at risk, and investors have been staying on the sidelines due to the uncertainty associated with it.Benchmark Sensex trades at 22.2 times fiscal year 2019 price to earnings (P/E), compared with 12.1 times FY19 earnings for the MSCI EM index, data from Bloomberg showed. Latest political surveys have given incumbent Prime Minister Narendra Modi's NDA only a fighting chance of reaching the halfway mark in the 542-member Lok Sabha, while his rivals were seen way behind. While India has historically traded at a strong premium to the broader emerging market gauge, the current uncertain scenario adds to the concerns over expensive valuations.Darshan Bhatt, co-founder and partner of Glovista Investments LLC, agreed with Memani and said his company has taken profits on its overweight allocation towards India from last year primarily owing to attractiveness of other markets, particularly, Latin America.“In our view, the main driver for India’s underperformance has been the dovish tilt undertaken by the Federal Reserve this year that has attracted flows towards higher beta and commodity oriented markets within Emerging Markets,” Bhatt said in an e-mail from Jersey City, US.In the first week of February, the rotation from developed markets equity funds to their emerging markets counterparts rolled on.Emerging markets equity funds absorbed more fresh money than developed markets equity funds for the 12th time in last 15 weeks, as they extended a run of inflows that started in early October, a February 8 note from EPFR Global showed.Bhatt finds Indian equities as very attractive within merging markets domain over the medium term owing to their solid earnings growth potential, portfolio diversification benefits and then improving macro backdrop. “However, in the near term, we are holding a neutral allocation towards India owing to: uncertainty surrounding sentiment-related moves prior to the elections; rich valuations on a relative basis, and potential for trade-related flair up with the USA,” he said.It looks like it is going to be a wait and watch until the election results are out, as fund managers choose to focus on the uncertainty surrounding it. “India remains a good growth story in the EM space, where growth is under a lot of pressure still. But the uncertainty around the upcoming elections is a reason to be cautious. So for the coming months, India does not look particularly well positioned to outperform,” Maarten-Jan Bakkum, senior emerging markets strategist at NN Investment Partners, said in an email from The Hague, Netherlands.Bakkum said his firm had not trimmed its India positions yet, but would consider it closer to the elections. 67985863 67952302 67969311

from Economic Times http://bit.ly/2S0whGn

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