Foreign investors may no longer be Overweight India, says Chris Wood

The more expensive mid-caps have continued to outperform blue chips, the latest Greed and Fear report said

Expensively valued mid-caps are continuing to outperform blue chips, leading to a scenario where portfolios of many FPIs are underperforming, the latest edition of Greed & Fear report said.

The relative outperformance of Indian equities to other markets may make foreign investors cautious, even as domestic flows are seen staying robust, Chris Wood said in his latest edition of the widely-followed Greed & Fear report.

Wood stated in his report that India is that emerging market where foreign investors may no longer be overweight in aggregate, given the combination of continuing outperformance and strong domestic flows.

A surprisingly bad outcome for the incumbent BJP government in the current six-week-long general election, is among the two potential domestic triggers for a correction, said Jefferies' Christopher Wood said in his latest GREED & fear note. Read More here

Expensive Midcaps Outperforming Bluechips

Wood highlighted that “more expensive mid-caps have continued to outperform blue chips” leading to many FPI portfolios underperforming.

“… more expensive mid-caps have continued to outperform blue chips with mid-caps accounting for about 60% of the inflows but only 30% of market capitalisation… This is the backdrop against which many foreigners’ portfolios have been underperforming,” it states while adding that two prominent high-profile sectors -- private sector banks and IT services – that have been traditionally owned by foreigners and historically accounted for a large share of the Nifty have underperformed in the recent past.

Since the start of 2024, FPIs have been net sellers of a little over $3 billion in Indian stocks.

The Runup in Banking

The Nifty Private Bank Index has underperformed Nifty 50 by 14% from a relative high in May 2023 and by 30% since a relative high in March 2019. While the Nifty IT Index has underperformed the Nifty by 15% since mid-February and by 34% since the relative high in late December 2021,” the report said.

Interestingly, it adds that private sector banks that have always been part of the Greed & fear portfolio “have enjoyed monumental outperformance since the end of 3Q 2002” and have been a major driver of the portfolio’s subsequent outperformance over this 22-year period.

It, however, goes on to add that private banks have seen their best on account of structural reforms. “…there is a growing narrative, which is probably correct, that the private sector banks have seen their best days. This is partly because the best customers have already been acquired while public sector banks, which still account for 61% of deposits, have become more competitive helped by Narendra Modi’s structural reforms such as the Insolvency and Bankruptcy Act of 2016,” the report said, with the caveat that this does not mean there is no merit in investment in private banks.

Greed & Fear's India portfolio - with 23% weightage to private banks - has outperformed the Nifty by 48% since early February 2023 despite banking shares lagging , because of exposure to “hot” sectors like real estate, energy and capex plays.

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Chris Wood continues to have a positive, structural view on India’s domestic demand cycle.