Foreign investors are keeping their faith in Indian markets, preferring to overlook the economy numbers for now. Image Credit: Gulf News Archive

Mumbai: India's shrinking economy is not stopping foreign investors from pouring money into the nation's stocks betting on a recovery. International buyers ploughed a net $6 billion into shares in Asia's third-largest economy in August - the most since March last year.

That's as all other markets in the region excluding China suffered net withdrawals during the month. Part of it is a bet that Indian equities will play catch-up after trailing the region's benchmark so far in 2020: the S&P BSE Sensex has underperformed the MSCI Asia Pacific Index by about 6.5 percentage points.

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Foreigners were also drawn to share sales by some of India's marquee financial firms - ICICI Bank Ltd., Axis Bank Ltd. and mortgage lender Housing Development Finance Corp raised a combined ($4.7 billion) last month.

Promise of faster growth

"We place India at the top of the list with China for investment returns over the next 12-24 months," said Nuno Fernandes, who helps oversee more than $2 billion in emerging-market assets at GW&K Investment Management. "India equities represent one of the fastest growth areas in the world."

Not shaken by contraction

Foreigners have remained net buyers even after data Monday showed India's economy shrank by a record 23.9 per cent in the June quarter, putting in a net $231 million in the first three days of September. Helping them look past the grim GDP data is the improvement in business activity from July after the lockdown curbs were eased.

"We need to look beyond the near term and consider companies that will benefit from the normalization of economic activity and demand," said Amit Goel, a fund manager at Fidelity International. Goel, who oversees $1.6 billion in India Focus Fund, said he bought shares of private banks, a large staples company and health-care firms in the past three months.

But infections cast a pall

Still, rapidly rising virus cases have put a dampener on investor confidence. India overtook Brazil on Monday with the world's second highest infection tally of 4.2 million.

"As long as Covid-19 cases continue, localized lockdowns are likely to hinder an economic recovery," said Kristy Fong, senior investment director for Asian Equities at Aberdeen Standard Investments. Aberdeen has turned "more defensive" as it expects a "patchy rather than a V-shaped recovery," she said.

For the bulls, there remain plenty of reasons to be optimistic about Indian shares. "The worst is behind us and we're steadily heading toward a recovery," Amit Shah, head of India equity research at BNP Paribas said in a note Thursday, citing improving auto sales, plentiful rains that will improve rural wages and the central bank's easy monetary policy.

BNP expects the Sensex to end the year at 41,500, 8 per cent higher from Friday's close.