FIIs optimistic on India but dichotomy remains: UBS positively cautious on global investor outlook

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Foreign institutional investors (FIIs) have turned optimistic on India, having pumped $9.5 billion into equities since March 2023, noted UBS in its recent report on global investor outlook. On the back of positive factors such as Indian markets trading at a 62 percent premium to emerging markets versus a 47 percent five-year average premium, it has retained its base case of 6.2 percent growth estimate for FY24.

According to UBS, here are the reasons why FIIs have taken a positive view of India:

The report observes that India's economic momentum remained strong despite fading reopening tailwinds. “On a seasonally adjusted (SA) sequential basis, the indicator rose 2% MoM (month-on-month) in April (versus 1.5%/1.1% MoM in March/February). The available high frequency indicators for May suggest economic momentum was sustained,” the UBS report noted.

FII sentiment is positive on the back of better economic, political and geopolitical outlooks as well as strong domestic flows. The expectation of the incumbent Prime Minister Narendra Modi winning the upcoming parliamentary elections has also been factored into the positive outlook.

In addition, it also observes that India stands to gain from the China+1 strategy as global business majors increasingly aim to rely on India as an additional major supply partner.

Reduction of the CPI inflation to a 25-month low of 4.3 percent in May 2023 was enabled by falling oil prices easing pressure, the report notes. UBS further expects the CPI inflation to average 5.1 percent for all of FY24.

The report does not rule out the possibility of policymakers intervening in the near future to contain price pressure as El Nino risks persist.

On the fiscal side, it remains optimistic on India's target to narrow the current account deficit to 1.5 percent of GDP in FY24, driven by lower energy prices and resilient services exports. Policymakers aim to reduce the consolidated fiscal deficit to below 7.5 percent by FY26.

However, while anticipating growth, the Switzerland-based brokerage continues to have a cautious view on the country compared to other emerging markets.

“As bank rates rise, we expect household flows to slow further. Given the context of weak growth and return on equity expectations, we remain cautious on India compared to EM,” it observed.

The report further observed that on most fundamental parameters like earnings growth outlook, return on equity, return on invested capital, etc, India is in the bottom half. “Hence, we believe there is a dichotomy between the fundamentals and India's high valuations,” the report noted.

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