Foreign fund flows to continue: BNP Paribas

Mumbai: French multinational bank and financial services company BNP Paribas believes that the recent recovery in foreign fund flows into emerging market equities including India would continue for another couple of months as the global equity investors are currently underweight on global emerging markets (GEM) by 2.5 per cent relative to the benchmark.

“Given improving fundamentals in GEM (improving earnings estimates and likely recovery in return on equity), we think the traditional ‘underweight GEM, overweight developed markets  (DM)’ trade deserves to be reversed. We are particularly surprised that GEM investors are underweight Asian equities while overweight Latin American equities. Over 2012-15, GEM investors bought Latin America, despite the commodity price collapse and the region’s commodity sensitivity,” said Manishi Raychaudhuri, Asia Pacific equity strategist, BNP Paribas.

Despite the ongoing political and economic uncertainties in some of the emerging markets, Mr Raychaudhuri said the recent recovery in EM equity flows is likely to continue.

“The recent flow recovery was predicted by our proprietary lead indicator, which predicts this momentum will continue for the next 8-10 months. We believe funds deserve to be reallocated from bonds to equities, from developed markets to EM equities and from Latin American equities to Asian equities. The under-ownership of GEM and Asia make a compelling case for such reallocation,” he added.

Foreign portfolio investors have invested Rs 5,873 crore in domestic equities in July till date after picking up stocks worth Rs 3,713 crore in May when the global markets remained highly volatile due to uncertainties surrounding the Brexit.

“Through 2015, India saw the worst earnings progression in Asia, with all sectors’ estimates secularly declining. Some have clearly turned around now like consumer discretionaries, materials and utilities. We also see signs of earnings bottoming out in industrials. Recovery in discretionaries fits our hypothesis of rural demand recovery,” pointed out Mr Raychaudhuri.

Apart from central bank’s liquidity injections, other factors that could drive inflows into emerging market equities is a shift in fund flows from bonds to equities.