Foreign investors are buying Indian financial firms lured by the prospect of a fresh credit cycle that could boost the stocks of the country's largest lenders, according to MUMBAI Reuters.
Foreign investors bought a net of $1.74 billion worth of Indian financial stocks in November, according to the data released by the National Securities Depository Ltd this week.
There are more than a third of the total $4.44 billion net inflows for the month.
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Indian financial stocks are trading at a premium to their historical average, but that is not necessarily the comparison investors are looking at.
Rob Brewis, fund manager at UK-based Aubrey Capital Management said that when you compare valuations across India, financials look more reasonably valued than some of the other sectors.
Brewis said that the potential for lending growth in India is probably better than almost anywhere else in the emerging markets, because of the double-digit multiples for consumer banks such as HDFC Bank Ltd orICICI Bank Ltd. Reuters spoke to six fund managers who said they were optimistic about a new capex cycle in India, fuelled by the government's infrastructure investments.
This growth cycle coincides with banks boasting the cleanest balance sheets in the past five-six years and average corporate leverage at a decade low, Manishi Raychaudhuri, head of equity research, Asia Pacific at BNP Paribas wrote in a note.
India is projected to be one of the world's fastest-growing economies and corporate earnings growth is expected to be among the strongest in Asia. Local and foreign investors have started to invest money into the domestic equity markets, which hit all-time highs last week.
Private banks are well-positioned to gain market share because of the improved macro outlook and continued investments by financial firms, particularly larger private sector banks, due to the improved franchise and process capabilities, said Sukumar Rajah, director of portfolio management, Franklin Templeton EM Equity.
We still see scope for further re-rating in select names after the recent rally. On a price-to-book valuation basis, financial stocks traded at a premium to their two-year historical average.
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 sell-off in other countries.
While India's benchmark stock index has risen 7.3% so far this year, the stock prices in China, South Korea and Taiwan have fallen between 12% and 19%.
That may not continue.
Sat Duhra, Asia equities portfolio manager at Janus Henderson Investors said it was hard to see India continuing this level of valuation premium over other markets in the face of rising external risks.
A major risk, according to Dhura, was the rebound in China due to relaxations in its zero-COVID policy, as India has been a beneficiary of China's falling share in emerging market indexes.