Forum Views - January 2023
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FORUM VIEWS - JANUARY 2023
Indian domestic investors to invest in equity markets are distinct
from those for FPIs. Appreciating those differing perspectives
could help both sets of investors to better understand the market
dynamic.
While there is no stereotypical FPI, my observations are based on
a reasonably large sample size across geographies, over the past
15 years. FPIs are prone to the following three mistakes when it
comes to investing in India.
The portfolio allocation for most FPIs follows the large established
asset classes - Home market Equities & Bonds, DM (Developed
market) Equities & Bonds and EM (Emerging Markets) equities &
bonds. The allocation to Emerging markets as a single bucket is a
lazy allocation and has delivered sub-par returns. In-fact
cumulative returns for the past 5 years have been negative for EM
indices, mostly on account of China. Research has shown that the
growth drivers of each emerging country are different since each
country is at a different stage of evolution. Thus, the economic
outcomes of the combined group of EM countries have never
been adequately synchronous to justify a combined allocation.
India has been a consistent positive outlier, as a growth economy,
delivering solid equity returns over a full business cycle.
While Jim O’Neill saw the futility of the BRICS concept and
extinguished it, the investing world seems too lazy to let go of the
EM indices, despite the skewed and poor returns. The addiction to
convenient indices has prevented most FPIs from isolating
investments to India. The smarter FPIs have of course abandoned
the popular EM indices and have done the research to allocate to
India. The chart below shows that a statistically significant
portion of FPI exposure to India is through some combination of
global asset classes rather than stand-alone India.
Top three FPI mistakes
1. Lazy Allocation Strategy
3. Misunderstanding Valuation
A frequent gripe by FPIs is that India is too expensive compared to
other EMs. That is indeed a statement of fact as can be seen from
the chart below. The Price Earning (PE) multiple of India has
historically traded at a premium to that of the EM basket and
China. India commands a premium because of the following
reasons:
•
Policy and legal framework that has historically protected the
rights of minority shareholders
•
Independent Central bank and Judiciary
•
A functioning liberal democracy with regulatory predictability
•
High standards of corporate governance and transparency
This inability to recognize India’s growth trajectory is the biggest
mistake FPIs continue to make.
The second most persistent misstep of FPIs is the attempt at
market timing of EMs in general and India in particular. Despite
abundant evidence to the contrary, many FPIs continue to believe
that they can unfailingly pick the top and bottom of the market
cycle. They use all kinds of global, EM and India-specific indicators
to divine suitable entry and exit points. This trading mentality is
perhaps the biggest reason why FPIs on average tend to miss out
on India’s top performing days. However, given the miniscule
allocation to EMs in general, this error gets lost in the attribution or
the industry would have naturally corrected this mistake.
2. Market Timing
Praveen Jagwani has 30 years of experience in banking and investment
management. Based in Singapore, he has been in his current role for fourteen
years and has the mandate to build a global franchise for India centric assets.
He started his career with ANZ Grindlays Bank, working with them in India,
Australia and Bahrain across Credit, Consumer Finance, Systems & Private
Banking. Later at Standard Chartered, as the Chief Investment Officer for Middle
East and South Asia, he built the Wealth Management and Investment Advisory
business. He then joined Merrill Lynch in London and managed their Hedge Fund
& Private Equity Advisory business.
He holds an under-graduate degree in Computer Science, a Masters degree in
Operations Research and an MBA. In 2002, he completed the Chartered Financial
Analysis (CFA) program.
On the personal front, he enjoys squash, trekking and meditation.
41
34
137
92
281
300
250
200
150
100
50
India
dedicated
funds
Asia-ex
Japan
Emerging
Market funds
Global
equity
funds
Others*
AUM (USD Billions)
*Others: SWF/Hedge Funds/Endowments/Pension/Insurance etc buying few stocks directly
India FPI AUM in Nov'22: USD 585 Billion
Sources for the article: Data used from NSDL, NSE, UTI Research, Motilal
Oswal Research, Morgan Stanley
Even though Indian equities have always traded at a valuation
premium, Indian equities have delivered returns far more than
China and EMs. For most FPIs this seems to be a mystifying
conundrum. They exhibit nervousness about India’s high multiple
and shy away from investing only to regret later when markets
move even higher. One reason for this odd behaviour is that these
FPIs start the investing decision by looking for cheap assets. India
never features in the list of inexpensive markets and therefore
many FPIs miss out on India’s economic boom.
FPIs historically have tended to dabble in Indian equities instead
of committing patient capital. Till such time they don’t carve out a
separate allocation to India and devote appropriate research
resources, they should expect mediocre returns. Attempting to
time the market has never delivered consistent returns in any
market and India is not different. Agonizing over valuations
prevents a deeper study of the market and its growth drivers,
thereby depriving FPIs of material wealth-creation opportunities
in Indian equities.
Summary
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