Case for investing in Indian equities by foreign investors is weak, says Kotak’s Sanjeev Prasad. Here's why

Prasad noted that India is facing challenges from being a part of the EM bucket as well as domestic challenges, such as high valuations. “At least that's how the foreign investors are looking at it," he adds.

While most market experts seem to be parroting that the selling by foreign institutional investors may be coming to a halt and inflows might pick up this year, Sanjeev Prasad of Kotak Institutional Equities believes the case for investing in Indian equities remains weak for more than one reasons. According to him, stock valuations continue to be significantly elevated which makes the investing case for Indian equities unattractive. Besides, the experience of investing in emerging market equities for global asset allocators has been poor with the MSCI Emerging Market Index delivering abysmal returns over the past 10 years compared to US equities, which are now hovering close to their all-time highs.

“There’s no reason why foreign investors should be coming back to India, to be honest with you,” Prasad noted. Foreign portfolio investors (FPIs) have continued their exit from emerging markets including India, with the trend showing no signs of reversal. In 2024, there was a net negative FPI flow of $0.8 billion. If you break it down between the primary and secondary part, primary was $14.4 billion positive, secondary was $15.2 billion negative, he adds.

“If you take that aside or remove it from the $13 billion (inflow on account of passives), the actual selling from FPIs in the secondary market (from active funds) will be closer to $28 billion. I think that’s a far bigger indicator of how the FPIs are looking at India,” he explained. “The US dollar is doing wonderfully well.” This, Prasad says, has compounded the attractiveness of US assets.  “So why would an asset allocator sitting in the US want to look at an emerging market country?” he asked.

Adding to the challenges for emerging markets is their lackluster performance over the past decade. “Last 10 years, cumulative dollar return, MSCI emerging market index was up 8 percent. That is it. Not 8 percent CAGR, 8 percent cumulative return. Against that, US S&P index is up 3x. NASDAQ is up 4x,” he adds.

Additionally, he notes that there have been tensions between China and the US as well as political challenges emerging in South Korea. “If you look at emerging markets as an asset class. It's been a disaster. There's no other word to use over here,”  Prasad said.

As per Reuters, as of November 2024 ( latest data available), China portfolio investment outflow reached $45.7 for the month. Similarly for other emerging markets (ex-China), the total outflows for the year, as per Bloomberg data was around $45 billion (for the year, as of December 2024).

Prasad noted that India is facing challenges from being a part of the EM bucket as well as domestic challenges, such as high valuations. “At least that's how the foreign investors are looking at it," he adds.

On valuations in India, Prasad says markets are overly excited. Beyond a few banks and some other names, he feels that most sectors and stocks are trading at high multiples which is concerning, especially at a time when growth is still slow. "In this environment, it's just very difficult to get excited about a market where valuations are frothy in most cases. You are seeing some challenges with respect to growth in parts of the Indian economy, particularly on the consumption side. You could see earning downward as we go forward," he adds.

Also read: Valuations absurd, will be 'comical' if retail investors keep buying: Kotak Institutional Equities

In the near-term, Prasad adds that how the US situation plays over the next few months will be important for foreign investors. "Investors would want to see over the next two to three months how the whole US situation is going in terms of domestic policies, foreign policies, immigration, healthcare etc. And then only, asset allocators (investors) will take a call on emerging markets including India," he explains.