Similarly, there were at least six occurrences when their buying momentum significantly went up as Sensex started trading below the PE multiple of 15.The premium commanded by the MSCI India Index over the MSCI World index, which represents developed market equities, has fallen by 4% from the eight-year average.While this may appear to be attractive for FPIs, what may concern them is the expansion of 3% in the premium of MSCI India over MSCI Emerging Market (EM) index. MUMBAI: India may look fundamentally attractive compared to its emerging market peers, but foreign investors may wait to see a recovery in underlying financials of companies before making fresh investments, given the high current valuation.The past data shows that buying by foreign portfolio investors (FPIs) in Indian equities picks up once at a one-year forward priceearnings (PE) multiple of 15.5 or lower.Currently, the benchmark Sensex is trading at a PE of 16.6 and not surprisingly, the FPI buying — as reflected by 21day moving average of their daily purchases — stands at a meagre $18.5 million, compared to $197 million during the rally in early April 2016.This is also lower than the moving average of $35 million at the beginning of the latest bout of gain where the Sensex advanced 5% and PE multiple has moved above 16.5 since June 24.This observation holds true since May 2014 although the valuation range of Indian market has shifted upwards.In the three years prior to the 2014 general election, a similar trend was visible while the Sensex traded between PE multiples of 12 and 14.5 and the buying enthusiasm was more evident when the benchmark traded below 13 times its one year forward earnings In the last two years there have been as many as seven instances when foreign investors pulled back from Indian equities as the Sensex started trading above 16 times its forward earnings.

Source: Economic Times July 13, 2016 19:57 UTC