While foreign portfolio investors (FPIs) have been net sellers year-to-date, they are showing a heightened interest in the Indian market and their fund flows are likely to see a turnaround in the second half of this calendar year, according to Jefferies.
The turnaround will happen as there is better clarity on government policy post the Union Budget, according to the brokerage's analysts.
The brokerage's latest report on the equity strategy for India summed up the FPI sentiment after meeting with more than 50 investors in their recent US roadshow.
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They wrote, "Interestingly, the FPIs seem more keen to invest in 'Consumption' driven capex themes such as residential real estate, airports, hotels, malls, etc. with good appetite to invest in the SMID (small and mid-cap) names in this space."
They added that GMR Airports had "one of the best investor schedules" and the analysts named Godrej Properties, GMR, Indian Hotels and Apollo Hospitals as their preferred names in the consumption-capex space.
More than govt-led capex
The analysts noted there was a good reception to their overweight cyclical or real-estate call as a wider group of FPIs believe that there will be a cyclical upturn in the Indian economy outside of the government infrastructure expenditure supported space.
A trigger for higher fund flows to India would be the rate cut and any slowdown in domestic retail flows, according to the report.
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The report stated, "India's 7%+ GDP growth path over the medium term and a large US$5Trn market cap has raised interest in Indian opportunities. A potential US fed rate cut later in the year could be a big trigger for higher FPI flows to India. India's weight in all cap international (non-US) is 5.9% but even higher at 8.5% in the international mid-cap benchmark. A sharp rally in the SMID indices (Nifty Small and Mid-cap 100 indices both +20% YTD) has made the Indian SMID space exciting for FPI investors. While valuation remains a key concern, a potential slowdown in domestic retail flows, a part of which is unsustainable (which is about half of the domestic flows constituted by discretionary mutual-fund investment and direct equity investing) can create entry opportunities for FPIs".
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