Foreign institutional investors (FIIs) have started 'booking their flight tickets to India', said Saurabh Mukherjea of Marcellus Investment Managers, a day after the Bharatiya Janata Party (BJP) secured a decisive win in the assembly elections of three states. "We have also started getting calls and queries from new foreign investors to manage their assets," he said.
Mukherjea's statement is backed by numbers, too. FIIs, who were net sellers in equities for August, September, and October, have already poured in Rs 12,200 crore in December so far, surpassing November's Rs 7,000 crore.
With political uncertainty out of the picture and global macros in favour at the moment, fund managers believe that the FII buying trend will accelerate further ahead of elections, likely surpassing previous instances and dwarfing FII inflows after elections.
Going by the historical trend of the last four general elections, FIIs have been net buyers in three months in the run-up to election month. Thus, cumulative FII flow could turn out to be positive for February, March, and April 2024.
Zooming out further to six months in the run-up to elections, there was a minor outflow of $243 million in 2009, likely in the aftermath of the global financial crisis, but there were large inflows in all other instances.
Discount to developed markets
With Nifty scaling above 21,000 and Sensex above 70,000, the valuation of Indian markets is higher than what it was back during the 2004 and 2009 elections.
However, the valuation discount between emerging markets (EMs) and developed markets (DMs) is wider now than historically. The number is below the 15-year average, indicating that EMs are trading at a deep discount to DMs, said analysts, making India an attractive destination ahead of elections.
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"Emerging markets are at a discount to their 15-year high valuations. So from that perspective, there's value in the wider emerging market," said Rahul Bhuskute, Chief Investment Officer (CIO), Bharti AXA Life Insurance.
Adding to this, Mihir Vora, CIO, Trust Mutual Fund, said, "Money will flow into India as the dollar is weakening. Furthermore, US bond yields have cooled from the 5 percent levels. India-dedicated money should pour in."
According to Vora's ballpark calculation, 70 percent of FII money comes from EM index funds or global index funds, such as MSCI EM, while 30 percent comes from dedicated India funds.
Is China a risk?
India's current weight in the MSCI EM index is 16 percent, and China's is about 28.4 percent. China's weight has declined from about 45 percent in 2021. So at some point in time, China might start looking attractive to foreign investors from a valuation perspective. This could happen sometime next year, as per Vora.
That said, Chinese markets have not delivered any returns, and there have been many false dawns over the last two-year period. Compared to that, India seems to be a beacon of stability, pointed out Bhuskute.
Recently, Moody's downgraded the outlook on China's credit rating to "negative" from "stable" on the back of rising debt in the world's second-largest economy.
The move "reflects the increased risks related to structurally and persistently lower medium-term economic growth and the ongoing downsizing of the property sector," the agency added.
Meanwhile, the Reserve Bank of India (RBI) has recently raised the FY24 gross domestic product (GDP) forecast to 7 percent and capacity utilisation in the manufacturing sector remains at a robust 74 percent, slightly higher than in previous quarters.
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Sectors that stand to benefit
Largecaps, largecaps, largecaps will be the flavour of the season. "When FIIs make a comeback in a big way, they will buy more large caps than smallcaps. They (FIIs) cannot buy smallcaps due to liquidity issues; they have to load up on largecaps," said Saurabh Mukherjea.
Bhuskute recalls that nine to 12 months ago, there was a period when he used to hear from many MNC brokers that FIIs were not happy with HDFC Bank as a suggestion. "Tell us something exciting," would be the reply from FIIs.
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"But today, if you have largecaps available at such an attractive relative valuation, why would an FII get into midcap or smallcap?" Bhuskute said.
Several largecap companies like HDFC Bank, HUL, Reliance Industries and TCS have given a flat to 10 percent return over the past year, making their valuations relatively attractive.
According to Vora, FIIs won't be able to ignore financials, despite over-ownership in the sector. He believes the increased risk weight on consumer loans is now priced into the stocks. "Money should come into domestic investment teams like banks, infrastructure, and construction stocks," he said, adding that real estate stocks too could see fund inflows.
In fact, between November 15 and 30, realty stocks saw $103 million worth of FII inflow, capital goods, $454 million, and autos, $256 million.
Bhuskute concurs. He sees FII money flowing into financial services, consumer discretionary, especially two-wheelers, and IT stocks. Between November 15 and 30, IT stocks saw FII inflows worth $239 million, indicating that the trend has already begun.
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