Why Are FIIs Preferring Other Markets? S Naren Says Indian Equities Are An 'Expensive Asset Class'
While India's economic fundamentals remain strong, FIIs are finding other global markets more attractive due to relatively lower valuations.
Indian equity markets, despite their lively domestic flows, are presenting a valuation challenge for foreign institutional investors, according to S. Naren, chief investment officer of ICICI Prudential Asset Management Co. While India's economic fundamentals remain strong, FIIs are finding other global markets more attractive due to relatively lower valuations.
"Valuations should lead to a correction. But markets have become a story of flows minus supply, and currently domestic flows are strong. Other markets trade at a fraction of India's valuations, so FIIs are not too keen on investing too much—not because India is a bad economy," said Naren.
The rest of the world is looking so cheap and they are wondering if they should invest in a "costly market", he explained.
Investors Should Moderate Return Expectations
Naren cautions investors that equities are currently an expensive asset class, and this is often met with skepticism. This comes from a crowd of investors who have perceived equities to be the best investment avenue.
A significant market correction, perhaps a minus 20% performance, might be necessary to drill this understanding down. Investors should moderate their return expectations, according to him.
With the risk-free rate hovering around 6%, he emphasises that a double-digit return is already 1.5 times the G-Sec rate, yet many investors still undervalue a 10% return. Naren calls investors to condition themselves for more moderate returns in the future.
Identifying Quiet Pockets Of Value
In the current market, there are no easy pockets of opportunities, according to Naren. He points to segments like electronic manufacturing services where valuations are already pricing in several years of growth. Instead, his strategy involves seeking value in quiet sectors, such as oil and gas in the past six months, precisely because they are forgotten.
The best opportunities arise from stocks where investors have grown frustrated and divested, leading to more reasonable valuations, Naren said. Such instances, he notes, can be found across various sectors, including retail and mid-cap cement stocks.
"Best opportunities have come out of stocks where they get frustrated and sell. Every stock is discovered today so return is made out of stocks were investors have gotten frustrated," he added.
