FPIs are yet to participate meaningfully in long-term India growth story: Hitesh Jain of Yes Securities

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Foreign portfolio investors (FPIs) poured nearly Rs 5,600 crore into equity markets in September after inflows hit a 20-month high of Rs 51,200 crore in August and clocked close to Rs 5,000 crore in July.

This is a clear sign of trend reversal since July when foreign investors turned buyers after nine months of massive net outflows worth Rs 2.46 lakh crore.

In an interview with Moneycontrol, Hitesh Jain, lead analyst - institutional equities at Yes Securities, talks about the key drivers behind strong inflow and what could lead to FPIs again becoming net sellers.

FPI inflows into equity markets are at multi-month highs. What's the key driving factor behind the surge?

A multitude of factors are supporting flows including lower inflation in India versus West, seven percent GDP growth better than any other major economy, FIIs' under-ownership of Indian equities compared with historical levels, exodus of investments from Russia, and funds also looking at diversifying investments away from China.

Does India have the potential to eat more into China's portion of the pie in the MSCI Emerging Markets (EM) Index? What does it take?

MSCI is a free float market cap-based index. So, if Chinese equities continue to underperform Indian benchmarks, India’s weightage in the MSCI EM pie will continue to rise. More allocation to Indian equities is quite a possibility given the sheer size in terms of market cap and its sustained premium over other EMs.

We only talk about China when we talk about diversification. Is India also emerging as an alternative investment destination to Russia?

India is the fifth largest market in the world and its best returns among EMs cannot be ignored. Although Russia’s equity market cap of $0.6 trillion is no match for India’s size ($3.6 trillion), the exodus of investments from Russia due to the prevalent geopolitical situation could be helping India’s flows.

What sectors and themes the FPIs are putting their money in?

India’s thrust on manufacturing and rebound in industrial output is drawing investments in capital goods. FIIs are pouring money into domestic facing sectors like banks and consumption stocks which are immune to global shocks and traction is apparent in terms of India’s credit growth and consumer spending.

How government policies are determining FPI investment decisions in India? Like in PLI (production linked incentive), what are your favourite bets in this space?

With clarity on General Anti-Avoidance Rule (GAAR) and including FPIs and foreign direct investment (FDI) fungibility for stocks/sectors, we think the government has done its part on the policy front. On PLI play, we bet on autos and white goods given the presence of large companies in these two categories.

What’s your call in the consumer-tech space?

With the dynamics evolving very rapidly in the consumer-tech space, it is hard to take a call for the near future. But the disruption and adaptation both are happening at a rapid pace which makes us think that companies in this space can surprise us positively over the next few years

Is the strong momentum in inflows an acknowledgment that India's growth story remains impressive?

Strong momentum in inflows for a month or two doesn’t justify long-term potential given that investments for a 10-20-year growth story are more tactical in nature. To be honest, we haven’t seen meaningful FPI inflows over the last seven years. FPI holdings in Indian markets have dropped to levels seen after global financial crisis. Thereby, we think FPIs are yet to participate meaningfully in the long-term India growth story.

What could be the three factors that may see inflow surge reversing and FPIs becoming net sellers?

Worsening of the global stagflationary environment, hard landing of the US economy, sharp depreciation of the rupee vis-à-vis other currencies, and downgrade in earnings.