Foreign investors switch to IPOs, exit overvalued Indian stocks

Foreign institutional investors are now screening their investments out of the overpriced Indian stocks and reorienting their funds in favour of a new brand of securities-fresh listings in the primary market, which promises comparatively realistic entry costs along with the potential of a handsome return.

This is mainly profit-taking after Indian stocks scaled record highs especially those on the NSE Nifty 50 index, whose valuations have now topped those of most major global markets. Investors are diverting their cash into IPOs that are usually priced lower and less competitive.

Foreign investors have sold a net $3.42 billion worth of equities in the secondary market this year, according to Central Depository Services Ltd, while buying a net $1.47 billion through primary market issuances in August alone.

According to a report by SG, foreign investors have bought over $6 billion of stock on the primary market in 2023. This is the first such bullish scenario since 2021. Describing the trend, Rajat Agarwal, equity strategist at SG for Asia said, "Foreign investors are avoiding the secondary market for long-term investment and going on primary market options due to the faster and higher returns in the primary market.". This also reflects tempered expectations of earnings growth in the secondary market.

The NSE Nifty 50 index has risen 14 per cent this year, with large- and mid-cap stocks trading at 24 times their projected 12-month earnings—the highest among major global markets—LSEG data show.

Meanwhile, India's primary market has been bustling, with the value of IPO listings reaching $7.3 billion so far this year, the most robust in Asia and ahead of China's $5.1 billion, according to Dealogic data.

Foreign investors are attracted to the relatively lower valuations in the primary market. "It's precisely the lower valuation that's ascribed to the lesser competition from the retail investors, index funds, ETFs, and other types of institutional investors," clarified Jon Withaar further, head of Asia Special Situations at Pictet Asset Management. Michael Collins, Chief Executive of WinCap Financial, said, "Many just price their initial public offerings conservatively in an attempt to make successful debuts." This is enticing to foreign investors who find chances of long-term growth here.

With the Federal Reserve cutting back on interest rates, analysts expect that foreign investors will keep their interest on primary market as they can ensure better returns in growing markets like India.

(With Reuters inputs)