POLL India equity outlook cut again as foreign funds seek value elsewhere in Asia - Reuters

India's equity market outlook has been downgraded for the second consecutive quarter, as foreign institutional investors continue to rotate funds toward other Asian markets offering better valuations. According to a recent Reuters poll, the benchmark index is now expected to post only modest gains over the next 12 months, with a median forecast of 18,500 points, down from the previous poll's 19,000. The cut reflects growing concerns over rich valuations, persistent foreign outflows, and a slowdown in corporate earnings growth.

Foreign funds have pulled out a net $2.4 billion from Indian equities since the start of the year, with the bulk of outflows occurring in the last two months. Analysts attribute this shift to attractive opportunities in markets like China, Taiwan, and South Korea, where price-to-earnings ratios are significantly lower. For instance, the MSCI China index trades at a forward P/E of 10.5, compared with India's 18.2, making the latter appear overvalued in the eyes of global investors.

The poll, which surveyed 20 fund managers and strategists, also highlighted a downward revision in earnings growth estimates. The consensus now expects Nifty 50 companies to post earnings growth of 13.2% in the current fiscal year, down from the 14.5% projected in the previous quarter. This slowdown is attributed to margin pressure in the IT and consumer staples sectors, as well as rising input costs.

Despite the downgrade, some analysts remain cautiously optimistic, noting that domestic institutional flows have partially offset foreign selling. Domestic mutual funds have invested $5.6 billion in equities over the same period, providing a cushion against sharper declines. However, the poll indicates that this support may not be sufficient if foreign outflows intensify. "The valuation gap is too wide to ignore," said one strategist. "Until earnings catch up or valuations correct, foreign investors will likely stay on the sidelines."

"India's premium to other Asian markets is at a 10-year high, and that's hard to justify given the earnings trajectory," analysts say.

The Reserve Bank of India's monetary policy stance also remains a headwind. With inflation hovering around 5.5%, above the central bank's 4% target, rate cuts are not expected until at least the second half of the year. Higher interest rates typically compress equity valuations, particularly for growth-oriented sectors.

In the near term, market participants will watch for cues from the upcoming earnings season and the government's budget, which could provide some relief through fiscal measures. However, the overall sentiment remains cautious, with many investors preferring to wait for a clearer signal before re-entering the market. As one fund manager noted, "The risk-reward is not compelling right now; patience is key."

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