© Reuters. FILE PHOTO: A trader looks at a graph on his computer at the ICAP sales floor in London, Britain January 3, 2018. REUTERS/Simon Dawson
By Anushka Trivedi
MUMBAI (Reuters) – Foreign investors are buying into Indian financial services firms, lured by the prospect of a credit reform that could lift the shares of the country’s largest lender.
Indian stocks are trading at a premium to their Asian peers, BNP Paribas (OTC: ) said, but foreign investors have found a better position in the economy, considering it cheaper because of its strong fundamentals.
The optimism is reflected in the inflow, as foreign investors bought $1.74 billion worth of Indian currencies in November, data released by the National Securities Depository Ltd this week showed.
That’s more than a third of the $4.44 billion in monthly revenue.
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“PALATABLE” VALUATION
Indian financial stocks are trading at their historic highs, but that’s not what speculators are looking for.
“As a foreign investor, when you compare valuations in India, investments look more expensive than other sectors,” said Rob Brewis, fund manager at Aubrey Capital Management in the UK.
Double-digit payouts at consumer banks such as HDFC Bank Ltd or ICICI Bank Ltd “are very sweet,” Brewis said, because the lending opportunities in India are “probably better than anywhere else in emerging markets.”
All six fund managers that Reuters spoke to were optimistic about the new movement in India, boosted by the government’s investment.
This growth is consistent with banks boasting the cleanest balance sheets in the last five to six years and corporate growth at a decade low, Manishi Raychaudhuri, head of financial research, Asia Pacific at BNP Paribas wrote in a note.
India is expected to be one of the fastest growing economies in the world and the growth in business investment is expected to be among the strongest in Asia. This has prompted local and foreign investors to pour money into the real estate market, which rose sharply last week.
Given the strong growth and continued investment by financial institutions, especially large private sector banks, to improve their business capabilities, banking institutions have an opportunity to continue to gain market share, said Sukumar Rajah, director of portfolio management, Franklin Templeton. The value of EM Equity.
“Despite the recent conference call, we still see opportunities to add more names.”
The optimism comes even as financial stocks are trading more than two years into their portfolio at valuations.
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CHINA RISK TO PREMIUM VALUATION
Equity valuations in India have always been high, given the growth of the economy, but the gap in emerging markets has widened this year due to strong sales in other countries.
While India’s benchmark stock index is up 7.3% so far this year, stocks in China, South Korea and Taiwan are down between 12% and 19%.
But that cannot go on.
“In the face of external threats, it is difficult to see India continuing to outperform other markets at this rate,” said Sat Duhra, Asia portfolio manager at Janus Henderson Investors.
The biggest risk, Mr Dhura said, was China’s stability due to relaxation in its zero-covid-19 policy, as India has benefited from China’s falling share in emerging markets.
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