Foreign investors dump $3.42 billion worth ‘expensive Indian stocks’; opt for IPOs instead

Foreign investors are selling their positions in pricey Indian equities and opting for new offerings in primary markets as they pursue more affordable access to the market and higher returns. Their selling has been motivated by profit-taking as Indian stocks trade at all-time highs and at valuations exceeding those of most major stock markets, according to a Reuters report.Instead, investors are investing in initial public offerings (IPOs), where valuations are lower and there is less competition for stocks.
According to India's Central Depository Services Ltd data quoted by Reuters, foreigners have sold a net $3.42 billion worth of equities in the secondary market so far, while purchasing a net $1.47 billion through primary market issuances this month.
A Societe Generale (SG) report reveals that foreigners have acquired more than $6 billion of stocks on the primary market this year, the highest since 2021.
"Foreign investors are shying from deploying funds into secondary market for long term and seeing better and faster return prospects in the primary market," said Rajat Agarwal, Asia equity strategist at SG.
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He added that they are sellers in the secondary market this year partly because earnings growth prospects have moderated.
India's NSE Nifty 50 index has increased by 14% this year, and the 12-month price-to-earnings ratio for its large-and-mid cap stocks is 24 times, the highest among major global markets, according to LSEG data.
Meanwhile, the Indian primary market has been active, with IPO listings of $7.3 billion so far this year - the highest in Asia, followed by China's $5.1 billion, according to Dealogic data.
Foreigners are attracted by the affordability of stocks in primary markets. Jon Withaar, head of Asia Special Situations, Pictet Asset Management, said the valuations tend to be lower in primary markets due to lack of competition from retail, index, ETFs and most types of institutional investors.
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"Companies offering IPOs or rights issues tend to price their shares conservatively to ensure a successful launch and attract more investor interest," said Michael Collins, chief executive officer of WinCap Financial.
"This lower valuation may also be seen as an opportunity for foreign investors who believe that these companies have potential for significant growth in the long run".
With the US Federal Reserve poised to lower interest rates and investors looking to enter riskier markets for higher returns, analysts expect foreigners will continue to use this route to own Indian stocks.