The worst can be behind EM flow

The Bloomberg Emerging Markets Capital Flow Proxy Index shows that capital flows to EMs remained low in calendar year 2022 and below the historical average. Radhika Rao, Senior Economist and Executive Director, DBS Bank, Singapore, said, “The pace of flows was however asynchronous as economies with wide external imbalances saw larger outflows than those with less risky balance runs such as Indonesia, Brazil etc.” “

India was no exception to this trend. The country’s equity market saw an outflow of $17.13 billion in CY22, showed NSE data. FIIs were also net sellers in India’s debt market. Heavy offtake by domestic institutional investors (DIIs) saved the day for India.

Here, much depends on the monetary policy stance of the US Federal Reserve, but the reopening of China is another important event. “Our analysis of historical inflows shows that India does not compete with China for FPI inflows. In a risk-off scenario, therefore, any incremental flows into China through the EM basket would mean flows into Indian markets,” said Amish Shah, head of India equity strategy at BofA Securities. Moreover, currently foreign institutional investors in India Investors are high at a multi-year low of 0.14% versus the peak of 1.2% in 2015, he said.

Still, India’s relatively expensive valuation may act as a deterrent. Bloomberg data shows that the MSCI India index is trading at a one-year forward price-to-earnings multiple of 19.53x.

What’s more, if India Inc’s earnings don’t meet Street expectations, it will make the valuation multiple jittery. In Q3FY23, India Inc’s revenue growth is likely to moderate sequentially. This is also as operating margin, which has been under pressure due to cost inflation pressures, may start improving. While analysts do not anticipate a sharp downside to FY24 consensus Nifty earnings per share estimates, the upgrade could happen gradually and selectively.

As things stand, the US Fed is expected to maintain its accommodative stance, although the quantum of rate hikes will come down. This should help moderate the strength of the US dollar, a safe haven asset, which generally bodes well for EM assets.

Vinod Karki, Head of Strategy, ICICI Securities Ltd. said, “EM has suffered a lot in calendar year 22 in terms of forex fund outflows, so we think the worst may be over, as most volume strength is in our hands. is behind.”

Second, the International Monetary Fund projects EM economies to show relatively better economic growth than developed markets in CY23, which provides some relief. That, along with China’s reopening, should help in increasing FII attention to the EM basket. However, China may see higher allocations than India as it bore the brunt of the EM selloff last year and has become relatively cheaper at valuations.

That said, not everything is hunky-dory for EM. With heightened global uncertainty, EMs could see a fresh decline in their fiscal slippages and widened trade deficits amid emerging economic growth.

“If the Fed pivot (a point at which the US Fed reverses its current monetary policy stance) moves beyond H2CY23, we could see a risk-off trade that is ahead of EM equities,” warned Shah of BofA Securities. Can get out.”

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