Why are overvalued India equities still attracting foreign investors?

I'm not sure how many of us are aware of the fact that India equity market had an outstanding performance for the year 2014. Looking at the performance of India Stock Exchange (commonly known as Nifty), the index managed to achieve a double digit gain of 33.14% in 2014 alone!

Nifty returns 33.14% in 2014

With India equities making great gains in 2014, many analyst are saying that the India market has fallen into the overvalued category. As a matter of fact, in one of my older post on undervalued countries as of August 2014, India sits at the top of the overvalued category. 

Despite the above, India equities have managed to defy all odds and posted an incredible return for 2014. However in 2015, latest market valuation has made India an unpopular choice for many investors. Its current Fwd P/E of 18.3 is way above the 10 year average of 15.9.

In addition, a report by JP Morgan dated 30th June 2015 indicates that India equities are valuated at +4.5 standard deviation from the global average as shown below:

India Overvalued

How about 2015?

A peak into Nifty's YTD for 2015 indicates that the index is at -0.7% as of 28th July 2015.

Flat Nifty as of 28 July 2015

Further scrutiny shows that for the first 6 months, the Nifty actually shed 5.12% with a low point of 7965.35 points recorded on the 11th of June 2015. After which from the 11th of June 2015 till 22 July 2015, the Nifty enjoyed a brief rally by gaining 8.39%!

Brief Rally, Nifty gains 8.39%

The Nifty rally from Mid June till the 3rd week of July 2015 was partially supported by net inflow of foreign funds as indicated by data taken from MIDF Research. Beginning from week ending June 26th till week ending July 24th (except week ending July 3rd), we can see a large amount of net inflow of USD being invested into India.

Hundreds of million of net inflow within a one month period.

Why the sudden interest India?

Positive economic outlook as stated below:

The economic recovery continued with encouraging growth and inflation numbers. 

• Index of industrial production expanded at pace of 4.1% y-o-y in April 2015 (against 2.1% in March 2015). 
• Inflation consumer price index continued to stay at moderate levels at 5.01% in June 2015, close to the levels seen in May 2015. 
• During its June 2015 policy meeting, the Reserve Bank of India announced an interest rate cut of 25 basis points. 
• Banks continued to cut their lending rates in June 2015 and we expect rates to be gradually lowered going forward, which will help economic recovery.
• Purchasing Managers' Index for India is at a healthy 51.3 (above the 50 level)
• IMF's target growth projection for India is 7.5% (which exceeds that of China)

Further optimism if:

Important bills such as the Goods and Services Tax bill and the land acquisition bill due to be taken up in the upper house during the monsoon session of parliament set to begin in July 2015. Successful passage of these bills will be an important determinant of the confidence of the market in the government’s ability to push through reforms.

Biggest challenge for India?

• Lower than expected rainfall during the monsoon season, which may have a negative impact on agricultural income. In addition, the agricultural export for India might suffer this year as highlighted in this article entitled "Agri Export Outlook Not Bright for India" from the Financial Express. 
• Failure to pass the GST bill could also be another problem that deters growth for India. India is in need of a single tax system (such as GST) in order to wipe out the various taxes and levies currently in practice. 

Summary

Many articles, reports and valuations on India paint a picture of minimal opportunity for investment. No doubt the reasons for the poor outlook are based on fundamental evaluations as seen by the data provided in this article. 

What irks me most is that despite the poor valuations, massive amount of foreign fund are flowing into India over the past one month. Why is that so? Is there an expectation of a short term rally? Perhaps overvalued is just an interpretation that does not justify the vast opportunity offered by the equity market of India?

Despite not having the answers for my own self posed questions, I believe there are enough facts and data in this post for you to do additional research and determine for yourself whether it is worth investing into India or not.

If the answer is yes, there's one feeder fund which invest directly into India that you may consider. Just email me at shanesee03@gmail.com if you like to find out which fund is it.

That's all for this post!

Cheers and have a great week ahead.

Can Europe offer us an opportunity for short term investment?

Now that Grexit is temporarily averted through another bailout by the European Union, we finally witness some form of normality returning to most major European markets. For the past couple of months we bear witness to the Euro markets being severely shaken by concerns that Greece could default on their loan and ultimately "exit" the European Union.

Benchmark index such as the EURO STOXX 50 was dragged down by fearful investor sentiments over the Greek issue. Since April 2015, the index was bearish right up till early July 2015 as shown below:

EURO STOXX 50

Fortunately after several marathon sessions of negotiation between Greece and the leaders from the European Union, another bailout deal was agreed upon, albeit with stricter austerity measures being imposed on Greeks. In other words, normalcy has been restored (at least for now) and the nerves of many fearful investors have been calmed.

Now that the Greek treat has subsided, let us take a look at a few key reasons that makes Europe attractive for us investors. 

Reason 1 : Cheaper Valuation

Index wise, the Euro STOXX 50 is trading at 15.8 times estimated earnings. Despite being up from 12.6 times in January.it is still low as compared to US equities earnings (S&P 500 is trading at 18.0 times).

In terms of country, the two key European countries, Germany and France have evaluations below the Global Average. In addition UK which is part of the European Union also has an evaluation that is slightly lower to the Global Average. All three countries are attractive for investment epsecially when compared against the United States and Japan.

Evaluation for Market at Developed Countries

Reason 2 : European Central Bank (ECB) injecting 1.1 trillion stimulus

In an attempt to boost euro zone economy, the ECB which is lead by the optimistic Mario Draghi. has launched a bond buying program since March 2015. This program which is a form of Quantitative Easing (QE) will inject 1.1 trillion euros into Eurozone through gradual buying of bank bonds as well as private and public sector debts of eurozone countries. It is estimated that 60 billion euros will be spent on a monthly basis from March 2015 till September 2016.

Why QE? Here's a simple illustration on what ECB is trying to create:

QE concept courtesy of BBC.com 

The announcement of the 1.1 trillion euro stimulus has also dragged the euro lower vs the US dollar. So far the ECB’s bond buying weakened the euro as much as 14 percent against the dollar this year. That helped push up exports in the first quarter, leading to a 0.4 percent growth in the region’s gross domestic product

Reason 3 : Positive corporate earnings expected!

A flurry of corporate earnings are scheduled to be announced this week. The big guns from Euro STOXX 50 such as SAP SE, Novartis AG and Daimler AG. Lenders Banco Santander SA, Deutsche Bank AG and BNP Paribas SA will post earnings next week. It is expected that automobile companies and banks will be announcing major increase in earnings. 

Summary

Grexit averted, cheaper evaluations, massive QE as well as improved corporate earnings, Europe is fast turning into an attractive area for investment as compared to other developed and emerging countries.  Despite all the attractive points highlighted, I would still urge you to carry out additional research before investing. 

Lastly if you like to invest into Europe, my recommendation is for you to invest via a unit trust fund that has exposure into companies listed in the Euro STOXX 50. I already have a fund in mind that I would like to recommend you to check it out. However as usual, I will not be publishing the fund's name here in order to prevent bias. If you like to find out the fund's name, just drop me an email at shanesee03@gmail.com

That's all from me! 

Cheers and happy investing!

P.S : If Europe is not your cup of tea, you can also check out other unit trust funds investing in other countries. These funds are also currently undergoing a 0% sales charge promotion. Further details available HERE.

Malaysia suffers 11 consecutive weeks of foreign outflows! Plus other key fund flow highlights for week ending 10th July 2015

Here's the latest fund flow report from MIDF research for week ended July 10, 2015. There are some interesting findings that might be worth your time to read.

Market Snapshot:

Greece:

• There was a flurry of activity over the weekend to decide the fate of Greece, which has sought a third bailout to help it face its EUR320b debt mountain.

China:

• The CSI300 rose 5.7% last week after losing 27% in the preceding three weeks.
• Bank of China injected Yuan35b into the money market through open market operations, the fifth cash injection since June 25, and said it will continue to support liquidity need of China Securities Finance Corporation Limited (CSF), the national margin trading service provider. 
• China Securities Regulatory Commission (CSRC) said it would provide capital to mutual funds in order to increase liquidity to help offset redemption pressures. (Author's comment : This is an unprecedented move by China regulators. The Government is actually bailing out mutual funds!)
• Authorities clamped down on “malicious short selling”.
• China will also ban major shareholders from selling stakes in listed companies for six months. 

Snapshot of Major Asian Indices (%)

Asian Indices : YTD as of 10 July 2015

Author's comment : Despite the immediate yet draconian measures implemented by the Chinese regulators, the crash of China's market seemed to be in control at least for now. As of writing (13th of July 2015), the CSI300 has added another 2.563%. 

For international investors, we are not exposed directly to the CSI300 market where the so called A-shares are traded. A-shares can only be traded by the mainland citizens. Foreign investment is only allowed to trade A-shares through a tightly-regulated structure known as the Qualified Foreign Institutional Investor (QFII) system. 

Because of tight regulations imposed for A-shares, most China and Greater China unit trust funds from Malaysia tend to invest into H-shares and Red Chips which are traded at the Hong Kong exchange as well as B-shares which are traded at Shanghai and Shenzhen exchange.  

By investing into a mixture of H-shares, Red Chips and B-shares, most China and Greater China mutual funds are showing losses that are lower as compared to the losses from A-shares over the past 3 weeks. If you check my report on the Top 10 Performing Greater China Unit Trust funds as of 1st July 2015, you'll notice the average loss of the top 10 funds over a 1 month period is only -1.91% as compared to -17.97% loss suffered by the Shanghai Stock Exchange.

Fund Flow Report:

• Investors classified as “foreign” were aggregate net sellers of listed equity in the 7 Asian stock markets that we track (Thailand, Indonesia, Philippines, India, Taiwan, Korea and Malaysia). The net amount sold surged to USD2.47b, the highest in a week this year
• Foreign investors’ net sale in Korea surged to USD1.2b last week, the most this year. Korea appears to be among the hardest hit over the developments in Greece and China.
• In Taiwan, foreign investors offloaded USD1.1b, the second highest in a week this year. However, the market was also struggling with a different kind of pressure. Taiwan was preparing for the arrival of Typhoon Chan-hom.
• Heavy foreign attrition from Thailand where the amount of USD319m offloaded was the highest in a week this year. 
• Meltdown in China cast a dark cloud over Bangkok as the Chinese market accounts for 12-13% of Thailand’s exports. 

Malaysia suffering the worst foreign fund outflow as compared to our closest neighbors

Weekly Net Flow of Foreign Fund

Tracking Money Flow - Malaysia

• Foreign investors have now been net sellers on Bursa for eleven consecutive weeks. Last week, investors classified as “foreign” sold equity listed in the open market on Bursa (i.e excluding off-market deals) amounted to RM811.7m on a net basis. That was the 7th highest this year.
• For 2015, last week’s selldown increased the cumulative net foreign outflow to RM9.8b, significantly surpassing the RM6.9b outflow for the entire 2014. 
• Local institutions mopped up RM785.7m in the open market last week.
• Local funds have mopped up RM11.2b this year, compared with RM8.2b in 2014.

Author's comment: It seems to me the local institutions are the ones supporting our local market. To me there are pros and cons to the foreign fund leaving Malaysian. 

Pros : Gradual reduction of foreign investment is way better then a sudden massive selling of foreign fund. History have shown that in a sentiment based environment such as the stock market, a sudden exodus of foreign funds could trigger panic which eventually would lead to a collapse in our stock market. Therefore, a slow and gradual exit of foreign funds is indeed a much preferred scenario for local investors as compared to the other one.

Cons : When foreign funds are net selling for 11 weeks in a row, it goes to show that Malaysia is loosing its attractiveness. Even with positive ratings given by Fitch early July 2015, the market continues to experience net foreign fund outflow! It is clear to me that as long as the RM42 billion debt problem is not resolved/clarified, we will continue to witness foreign funds exiting Malaysia.

The other trend that I noticed is the continuous buying by our local institutions over the past 7 weeks. If you are able to see the bigger picture, you''ll realize that it is us whom are actually buying up everything that was sold by the foreign investors. It is from the money that you and I have invested into local mutual funds, tabungs, danas and retirement schemes that are being used to purchase all that was sold by foreign funds. Is this a sustainable way to promote long term growth to the market? We all have to just wait and see. 

That's all for me! Cheers and happy investing!

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P.P.S : With uncertainties clouding our local stock market, ever considered diversifying your investment into other countries? If the answer is yes, try checking out some of these overseas funds available for Malaysian investors for as low as 0% sales charge! Click HERE to find out more.