'Ghar Wapsi' of US money is happening; India should focus on strengthening GDP, earnings, says Nilesh Shah of Kotak MF

Nilesh Shah, managing director of Kotak AMC

At a time when foreign institutional investors (FIIs) are selling shares in huge quantity, Nilesh Shah, managing director of Kotak Mutual Fund, said that it is "Ghar Wapsi" of US money as US risk-free rates remain attractive.

The risk-free rate, which is around 4.5-5 percent, raises doubts in the minds of FIIs about whether they should consider emerging markets as an asset class, he said.

More importantly, in such a scenario, according to Shah, India must focus on strengthening GDP growth, corporate earnings, and governance standards

"Eventually, either emerging markets will regain favour, or global investors will recognise India as distinct from the broader emerging market category, prompting them to return," said Shah said in a conversation with Moneycontrol.

Indian markets have delivered returns in dollar terms similar to US markets, Shah said. He added that as of yesterday (Friday, January 31), the Nifty 50 had delivered an 11 percent dollar return over the past five years, while the Dow Jones had returned about 11.37 percent. While Indian markets may not have performed as well in the past year, they have done exceptionally well over the past five years, he said.

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Currently, FIIs are exiting emerging markets, where China holds the largest weight at over 30 percent, Shah said. Over the past 17 years, Chinese markets have failed to deliver any meaningful returns, he added.

"The massive underperformance of China, coupled with the significant outperformance of the US, has raised doubts among investors about emerging markets as an asset class," Shah said. As a result, many passive funds are witnessing redemptions, leading to further withdrawals from emerging markets.

Additionally, FIIs currently hold an $800 billion position in India, which is highly profitable. Compared to other emerging markets, India has performed exceptionally well, and its weightage in global portfolios may now appear high, creating a temptation for profit-booking, Shah explained.

Considering all these factors, while FIIs remain constructive on India in the long term, they may choose to book profits and reallocate to US markets, where interest rates are attractive, he said.