Rally here to stay; foreign investors playing the India story via midcaps, says this wealth manager 

FIIs playing the India story via midcaps

The breath-taking rally on Dalal Street post BJP’s clean sweep in the state elections has got foreign money gushing back into India. Foreign Institutional Investors (FIIs) are making a beeline for Indian stocks as the ruling party’s stunning victory has allayed concerns over political uncertainty and policy continuity. Not just that, the latest growth figures have further restored confidence in the Indian economy at a time when developed economies are staring at a recession amid elevated interest rates and stubborn inflation. All these factors put together are culminating into a beautiful upmove on the benchmark Nifty50 which is marching towards new milestones on a daily basis.

Thus far, midcaps have been the cynosure of all eyes but now underperformance  by largecaps seems to be reversing with participation from behemoths like ICICI Bank and HDFC Bank. But the big question is – are valuations becoming a cause for worry?

In an interview to Moneycontrol, Feroze Azeez, Deputy CEO, Anand Rathi Wealth expressed optimism about the current rally in the Indian equity market. The surge, fuelled by the resolution of political uncertainty, has been a cause for celebration among investors. Feroze highlights the positive historical correlation between general elections and market performance, emphasising that the last five elections have consistently yielded positive returns within a one-year timeframe.

Will largecaps take the lead?

Over the past three years, equity-heavy portfolios have reaped substantial rewards, and the recent focus on smallcap has proven successful throughout the calendar year. Feroze attributes the ongoing rally to a paradigm shift in the behaviour of Foreign Institutional Investors (FIIs). Unlike five years ago, when FIIs primarily participated in the Nifty50, they are now actively engaging with midcap stocks. “The MSCI small-cap domestic India index includes an additional 195 stocks compared to the Nifty smallcap 250. Analysing the Foreign Institutional holding in these additional stocks offers insights into potential opportunities. If the hypothesis holds true, it suggests promising and robust valuations for the broader markets as a whole when playing the India growth narrative.”

This shift, he says, signifies a broader market appeal, with FIIs exploring opportunities beyond largecap stocks. While acknowledging pockets of overvaluation, especially for stocks with a PE ratio exceeding 50 and 100, Feroze stresses on the presence of reasonable and robust valuations in the broader market. “You can always spot a 15-20 percent growth story for the next 5-10 years in the broader market and FIIs seem to be playing that.”

Also Read: Foreign investors to soon rush for India, time to look at largecaps, says Saurabh Mukherjea 

Is the rally sustainable?

Despite the smallcap catch-up, the Nifty seems reasonably valued, says Feroze. The primary risk lies in potential earnings shortfall as the market's robustness hinges on earnings, contributing to 60-70 percent of the performance. India's market performance is intricately tied to earnings, and any negative surprises in the upcoming year could result in pullbacks, warns Feroze.

Consumption or manufacturing – What should be the focus area?

Despite disappointing volume growth in the second quarter, Feroze anticipates a revival in rural demand driven by increased government spending in the run-up to the elections. According to him, market exaggerations create opportunities, as trends tend to be overvalued. Despite recent FMCG struggles, a cautious government with a 45 percent fiscal deficit in seven months indicates potential for rural demand growth. Moreover, increased infrastructure spending in the runup to the elections could bode well for the FMCG sector.

‘SIPs should be a recurring part of investment DNA’

Feroze believes that the sustained growth in SIP numbers is a result of the shift in retail investor behaviour towards education-driven investments. Notably, SIP inflows have surged from Rs 10,000 crores in October 2021 to a robust Rs 17,000 crores in October 2023, even during a period of stagnant market performance. Feroze expects SIP flows to reach Rs 25,000 crores within two years.

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