India most under-owned by foreign investors among EMs, correction may attract dollars: CLSA's Alexander Redman

The single biggest constraint for foreign investors, according to Redman has been "expensive valuations" and many adhere to processes that forbid accumulating Indian equities at expensive valuations.

Compared to other emerging markets, Indian equities have one of the lowest FII ownership at 17 percent, making it the most-insulated in case of any tariff-related announcement by the incoming Trump administration, CLSA said on November 18.

In its recent report, CLSA has said that India stands to benefit from an appreciable "moat" should international trade hostilities heat up again.

During a media briefing in Mumbai on the sidelines of CLSA's India Forum, Alexander Redman, Chief Equity Strategist at CLSA said India's fortunes are controlled by domestic investors, who are in the driver’s seat. "You won't find another country where equity market momentum is so strongly tied to domestic mutual fund flows. Domestic investors are clearly in the driver’s seat, compensating for $14 billion in net foreign selling since September," Redman said. He added that the ongoing correction in Indian stock market provides an opportunity many clients have been waiting for.

"India, in dollar terms, is now 12 percent off its peak, which addresses concerns about expensive valuations and creates an attractive entry point," Redman said.

CLSA's equity strategist said that even though the market still looks a bit expensive relative to what may be warranted, it has come down significantly from the peak. "Our model forecasts a 16 percent upside in dollar terms over the next 12 months, with an 80 percent confidence level. This is driven by factors such as stable dollar strength, accelerating Indian money supply growth, projected ISM headline numbers returning to 52, and Indian industrial production growth of 6.5 percent. These dynamics make India's forecasted performance higher than most emerging markets."

He added that foreign fund managers' Underweight India stance has been frustrating for many. "The majority of emerging market managers have 'Underweighted' India due to valuations, missing out on its outperformance. However, recent developments, including disappointment over China's fiscal stimulus and the potential re-election of Trump, could be catalysts for foreign investors to stop selling, and start re-accumulating."

Read More: India most-insulated among EMs to Trump's tariff plans, China most vulnerable

Shaun Cochran, Head of Research, CLSA agreed that most foreign investors have been waiting for a correction to re-consider India. "The domestic investment community has created a self-reinforcing cycle of flows driving performance and attracting more flows. Foreign investors, previously focused on China and reluctant to pay India's valuations, are now re-evaluating their positions. Growth at a reasonable price is becoming a more critical metric, as cheap valuations are unlikely for India given its structural growth story," he explained.

Cochran added that value funds are redefining their metrics to ensure they can access India's growth story. "Over time, more growth and value funds will participate, reinforcing India’s position in global portfolios," he said.

Read More: CLSA raises India allocation to 20% Overweight on potential foreign inflows

The single biggest constraint for foreign investors, according to Redman has been "expensive valuations" and many adhere to processes that forbid accumulating Indian equities at expensive valuations. But the valuation metrics, he said, often do a lot of disservice to India. "The cyclically adjusted P/E metric assumes tomorrow's earnings will resemble yesterday's. But in India, earnings have structurally outpaced this assumption. Similarly, while India's Price-to-Book ratio appears high at four times, adjusted models incorporating growth and ROE show the premium is more justified. Historical comparisons show India's premium to warranted Price-to-Book is now at 29 percent, aligning with long-term averages," he said.

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