ET Intelligence Group: The Street might be wondering why foreign portfolio investors (FPI) want to invest in Indian equities when valuations appear stretched by all conventional yardsticks. FPIs have invested nearly $6 billion in Indian equities since the beginning of the year, the highest among the competing economies in Asia.
The prime reason is the widening of the gap between equities earnings yields — inverse of price-earnings multiples — and the 10-year US bond yield. The spread between India’s earnings yield and US bond yield stood at 3.03 per cent compared with the 10-year average of 4.08 per cent, according to Bloomberg. The spread had touched a low of 2.37 per cent on September 14, 2018. The increase in the spread reflects the relative attractiveness of equities over bonds.
US 10-year bond yields fell to about 2.48 per cent from a high of 3.28 per cent in November last year.
Therefore, portfolio managers increase their exposure to equities and re-rates stocks when the spread begins to widen. Theoretically, a narrower reading of the spread suggests that equities are overvalued, while the reverse is true for a higher reading. Credit Suisse in its note said that the rising spread supports the argument in favour of investing in India despite elevated P/E multiples. In a recent Credit Suisse conference, portfolio managers said that they see India as a relatively safer destination amid mounting concerns over global growth.
Globally, traders are increasing their bets that major central banks will hold off monetary tightening. As a result, sovereign bond yields in the developed markets have dropped to the lowest in a year. Concerns over a global slowdown can be gauged from the fact that the value of negative yielding bonds swelled to $10 trillion, a 36-month high, suggesting economic weakness across the entire spectrum of the developed markets.
Lower bond yields in the developed markets typically push flows to emerging markets as investors search for better yields.
Emerging markets in Asia have witnessed three consecutive months of inflows for the first time in two years.
Foreign funds invested as much as $6.6 billion in Asian emerging markets, excluding China, in March. Of this, $4.2 billion was deployed into Indian equities.