Foreign Buyers Pour Money Into Indian Stocks Despite Sinking Economy

India's shrinking economy is not stopping foreign investors from pouring money into the nation's stocks betting on a recovery. International buyers plowed a net $6 billion into shares in Asia's third-largest economy in August, the most since March last year. That's as all other markets in the region excluding China suffered net withdrawals during the month.

Part of it is a bet that Indian equities will play catch-up after trailing the region's benchmark so far in 2020: the S&P BSE Sensex has underperformed the MSCI Asia Pacific Index by about 6.5 percentage points. Foreigners were also drawn to share sales by some of India's marquee financial firms -- ICICI Bank, Axis Bank and mortgage lender Housing Development Finance Corporation raised a combined ($4.7 billion) last month.

"We place India at the top of the list with China for investment returns over the next 12-24 months," said Nuno Fernandes, who helps oversee more than $2 billion in emerging-market assets at GW&K Investment Management LLC in New York. "India equities represent one of the fastest growth areas in the world."

Foreigners have remained net buyers even after data Monday showed India's economy shrank by a record 23.9 per cent in the June quarter, putting in a net $231 million in the first three days of September. Helping them look past the grim GDP data is the improvement in business activity from July after the lockdown curbs were eased.

"We need to look beyond the near term and consider companies that will benefit from the normalization of economic activity and demand," said Amit Goel, a fund manager at Fidelity International. Mr Goel, who oversees $1.6 billion in India Focus Fund, said he bought shares of private banks, a large staples company and health-care firms in the past three months.

Still, rapidly rising virus cases have put a dampener on investor confidence. India overtook Brazil on Monday with the world's second highest infection tally of 42 lakh. The S&P BSE Sensex slipped 0.3 per cent as of 10:54 a.m. in Mumbai, reversing early gains and is headed for its lowest close in about three weeks.

"As long as Covid-19 cases continue, localized lockdowns are likely to hinder an economic recovery," said Kristy Fong, senior investment director for Asian Equities at Aberdeen Standard Investments. Aberdeen has turned "more defensive" as it expects a "patchy rather than a V-shaped recovery," she said.

For the bulls, there remain plenty of reasons to be optimistic about Indian shares.

"The worst is behind us and we're steadily heading toward a recovery," Amit Shah, head of India equity research at BNP Paribas said in a note Thursday, citing improving auto sales, plentiful rains that will improve rural wages and the central bank's easy monetary policy. BNP expects the Sensex to end the year at 41,500, 8 per cent higher from Friday's close.