Record, relentless outflows have hit the Indian equity market hard, a dramatic about-face following two years of strong buying by international players.
International investors have sold a net US$25.7 billion in Indian equities so far this year. That's essentially double the previous peak in outflows of US$12.9 billion set in 2008, during the Global Financial Crisis. International flows were inbound into India every year other than three over the course of the last two decades, with the only other exception a modest net outflow of US$4.6 billion in 2018.
This year's selling is by far the highest-ever rate of outflows, SocGen notes, even if you adjust for the change in the size of the Indian equity market. And in the French bank's eyes, it's not going to end anytime soon. That's even with foreign ownership of Indian equities falling to 17.5%, the lowest in five years. At their peak holding power in 2020, foreigners owned 20.5% of the Indian market.
Tech has seen the heaviest selling, as it has elsewhere in the world. Emerging markets suffer anytime there are external events that cause U.S. and other Western investors to switch to "risk-off" mode. The start of the Russian invasion of Ukraine triggered that phenomenon. At the same time, rising interest rates dented the growth stock story.
The decline in the Indian rupee is also partly to blame. The rupee has fallen 3.1% since May 5 and 6.2% since Jan. 13. The currency is still set to decline another 3% by the end of the year, according to SocGen's emerging-market strategy team, taking it to around 80 rupees to the U.S. dollar. It's trading at 78.36 as of Monday.
After spending the last two decades in Asia, I have a mental math number in mind for currency translations, using US$1 as my base. That number has been thrown out of whack by the Japanese yen, where my informal exchange rate is "a little over ¥100" but the currency has blown out to ¥135, its weakest level since 1998.
It has been blown out by the Indian rupee, too. Far from "around 55 rupees" to the greenback, my mental math is a decade out of date: it last stood at 55 to the U.S. dollar in 2013. The rupee first broke through the 70 barrier to the U.S. dollar in 2018, and only in the summer of 2019 strengthened to lower than that, at 68 rupees and change. It suffered a sharp weakening in early 2020, which is ground it has yet to recover.
Inflation and the price of oil are driving the rupee's movements. India is the world's third-largest oil importer, behind only China and the United States. Inflation climbed to 7.04% in May, although that was at least a dip from the 7.8% rate in April. The Reserve Bank of India will hope its recent rate hikes have at least capped the peak.
Indian equities benefitted as the first waves of Covid eased. We saw international investors start buying into India in May 2020, with buying particularly strong at the end of 2020 and start of 2021. That's even though domestic investors stayed net sellers until almost a year later, March 2021.
By the time domestic players bought into the rally, some international investors were already selling out. The selling started in net terms in October 2021, although in aggregate they were net buyers over the course of 2021, and it is in this year that the clear pattern of strong outflows has been set.
The movements in India stand out compared with the chip- and tech-heavy markets in South Korea and Taiwan. Those markets have seen persistent selling by international investors in each of 2020, 2021 and 2022. India is unusual in seeing selling only manifest itself this year.
SocGen calculates the average price for international investors buying into the Nifty 50 index is around 12,800. Because they began their buying later, Indian investors purchased at an average of 16,800. That's significant because, at the Nifty 50's current level of 15,830, international investors are still selling into profits, unlike their domestic counterparts, who would be realizing losses.
Despite their declines, Indian stocks are still trading at a premium compared to their historical average, albeit one that has fallen below 10%. They're particularly expensive against other Asian equities, where SocGen says the premium is at a historical high of 60%.
That leaves the future movements dependent on earnings and whether companies can maintain their growth momentum. But growth is slowing, meaning it's hard to justify such a premium.
Indeed, the change in 12-month forward-looking earnings estimates has seen India move from the market with the best prospects to the one with the worst in terms of forecasts. The Southeast Asian nations in ASEAN have taken over that earnings-momentum mantle.
As a result, outflows look set to continue. Thanks to the challenge to future earnings, "we don't expect the trend to reverse anytime soon and expect foreign flows to continue to find avenues to ASEAN markets, which offer a better combination of earnings recovery and reasonable valuation," the SocGen Asia equity strategy team write.
Indonesian stocks would be prime candidates for emerging-Asia exposure that avoids any of the policy risk you find in China. The Jakarta market is small and highly concentrated, but it has seen net buying by international investors in each of the last three years.
International sellers have been bellwethers of the Indian market. Their selling now suggests that 2022 will continue to be a torrid year for Indian stocks.