Perhaps the most important reason for the ongoing correction in the markets has been the sale by FIIs. Foreign investors had piled into Indian markets in 2014 due to huge expectations from the Modi government. So much so that India's weightage in FIIs portfolio's reached all time highs. Such was the enthusiasm, many stocks with questionable fundamentals soared to life highs. A reality check was due. That is what we are witnessing right now.
What is interesting is the fact that FII's haven't dumped Indian stocks left right and center. However, they have certainly exited the fundamentally weak ones. Where did they take their profits earned in India? It's safe to say that some of it went to the Chinese market. The astonishing rise seen in Chinese stocks has attracted a lot of hot money in to the dragon nation. Chinese stocks are up a stunning 142% over the last year compared to the 10% gain in the Nifty. As per an article in the Economic Times, the P/E ratio of the Chinese market is nearly 25 times earnings!
So does this mean that we can expect some money to return to India soon? We believe this would not be a smart way of looking at the issue. FIIs have the option of investing in any market in the world. If a particular market at a given point of time looks vulnerable (e.g. India at the start of this year); the short term money makes a quick exit for the best destination available at that time. Therefore, if FIIs were to pull out of China for whatever reason, there is no reason to expect them to come rushing back to India. Unless of course the Indian markets look very attractive to them at that time. Unfortunately, this is not the case today.
The BSE-Sensex and NSE-Nifty are trading at above average valuations of about 19 and 22 times earnings respectively. While Indian stocks may not be very expensive right now, they are certainly not cheap either. Also, the FY15 earning season has been dismal. Without a significant pickup in the economy, it is not possible to build a bullish case for an earnings recovery. And without a pickup in earnings, the Indian markets will not appear attractive to FIIs irrespective of what happens in China.