Foreign investments are pouring into Indian financial firms, lured by the prospects of a fresh credit cycle that may boost the stocks of the country’s largest lenders. Indian shares are trading at a record-high valuation premium as compared to their Asian counterparts, but overseas investors have found a bright spot in financials, considering them relatively cheap given their strong fundamentals. The optimism is reflected in inflows, with foreign investors buying a net of $1.74 billion worth of Indian financial stocks in November, data released by the National Securities Depository Ltd this week showed. And that is more than a third of the total $4.44 billion net inflows for the month.
The robust emergence of Indian Stocks in the global market has given reasons for foreign investors to look for brighter prospects in investing in India. The confidence is evident from the rush in inflows with foreign investors putting $1.74 in Indian financial stocks in the month of November 2022. And significantly this is more than a third of India’s total inflows of $4.44 billion.
Indian financial stocks are trading at a best to their historical average, but that is not necessarily the comparison investors are looking at. As a foreign investor, when they are comparing valuations across India, financials look more reasonably valued than some of the other sectors.
Indian Private Sector Banks are probably the most palatable sector
Paying double-digit multiples for consumer banks such as HDFC Bank Ltd or ICICI Bank Ltd is much more palatable as the potential for lending growth in India is probably better than almost anywhere else in emerging markets. And this is one of the market sentiments that is pushing global investors towards the Indian Stock Market.
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Investors are pouring their money in the fastest growing economy
Besides, India is now acknowledged to be among the world’s fastest-growing economies and corporate earnings growth is expected to remain one of the strongest in Asia. This has prompted local and foreign investors to pour money into the domestic equity markets, which hit all-time highs last week.
The improved macro outlook and continued investments by financial firms, especially larger private sector banks, while improving their franchise and process capabilities, have positioned Private Banks to continue gaining market share.
The valuation of Indian equities has always been comparatively lofty, to account for the growth potential, but the disparity with emerging market peers has widened this year due to a heavy sell-off in other countries. While India’s benchmark stock index (NSEI) has risen 7.3% so far this year, stocks in China (SSEC), South Korea (KS11) and Taiwan (TWII) have fallen between 12% and 19%. But that may not continue for long.
A major risk was a continued bounce back in Chinese stocks due to relaxations in its zero-COVID policy; given India has always been a beneficiary of China’s falling share in emerging market indexes.
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