India an attractive destination for FIIs despite China’s market-strengthening attempts: Pramod Gubbi

India vs China: The preferred bet?

India’s relatively favourable investment climate, consistent economic growth and stock market performance over several decades should gradually assuage investor apprehensions, Pramod Gubbi, co-founder of Marcellus Investment Managers, told Moneycontrol in an exclusive interview on February 6.

Certainly, he says, there are segments within the foreign institutional investor community that see potential value in China despite acknowledging its well-known challenges. But that's still a minority, Gubbi says.

On investment themes in India, he says women-centric initiatives, private sector capex, and undervalued private sector banks hold promise.

Edited excerpts:

Despite the government's commitment to fiscal consolidation, Moody's has raised concerns about high debt affordability. As we await the full-year budget, do you anticipate any change in India's credit ratings?

I think more than the rating agencies, we should look at the market response. The market response has been fairly positive in terms of the government's fiscal consolidation plan. The track record the government has in its effort to revive the economy amidst COVID-19 challenges is also positive.

In fact, the big driver in terms of cost of capital will come with India’s addition to the bond indices. That itself will mean significant flows and potentially lower bond yields, and, as a result, lower cost of capital. This reduction in the cost of capital will enable consumers and corporations to borrow at more favourable rates, stimulating investment in economic growth.

Despite the absence of rating upgrades, the market's endorsement of the government's fiscal strategy is evident. Of course, with an upgrade, it will have another effect in terms of lowering cost of capital, but we're already seeing the market giving a thumbs-up to this fiscal consolidation strategy of the government.

Markets have given a thumbs-up to the fiscally prudent budget. But with expectations leaning towards a rate cut in the second half of the year, would you say that the rally has peaked. How do you envision the market's trajectory, moving forward?

Certainly, when it comes to foreign inflows, the trajectory might align with potential rate cuts by the Fed. However, it is uncertain when such cuts may materialise, given the current resilience of the economy. This might see Western central banks not feeling an urgent need to implement rate cuts to stimulate their economies, a scenario mirrored in India.

Nevertheless, disregarding external flows, domestic inflows have displayed robustness. In the short term, these flows are likely to dictate market movements, maintaining stability. Looking ahead, there appears to be significant foreign investor interest in India, especially when compared to other emerging markets. Despite concerns about valuations, which have traditionally traded at a premium, India's consistent economic growth and stock market performance over several decades should gradually assuage investor apprehensions. Any corrections in valuations could provide downside protection, making entry points more appealing to investors. Thus, from a long-term perspective, foreign inflows seem poised to remain strong, irrespective of potential rate cuts.

Also Read: China's market restrictions won't help, may be bad for EMs, no immediate impact on India

Could the next major risk for the Indian markets stem from China, considering the Chinese government's initiatives to enhance its equity markets and the relatively inexpensive valuations, compared to India?

Certainly, there are segments within the foreign institutional investor community that see potential value in China despite acknowledging its well-known challenges. But I would say that's still a minority, which is looking to bottom fish in terms of valuations. By and large, the majority have been fairly disappointed with the way China has delivered.

Despite China's impressive economic growth over the last couple of decades, there isn't much to show in terms of stock market returns, partly due to government policies hindering private capital's ability to generate returns. Changing this sentiment would require significant policy shifts from China, which is unlikely to happen swiftly. I would think China will have to do a lot more in terms of policy decisions to provide comfort to foreign investors. Therefore, India may continue to stand out as a more appealing opportunity for foreign investors, given its relatively favourable investment climate.

With the interim budget out of the way, what are the themes that are catching your fancy now?

We've been discussing themes centred around women, a focus highlighted by the finance minister in the budget. It encompasses aspects such as women's participation in the workforce, their financial inclusion, education, and job opportunities, offering promising investment avenues.

Another theme to watch is the resurgence of private sector capex after a prolonged period of stagnation. I think the government has done the heavy- lifting, in terms of capital expenditure through infrastructure spending. It's about time that the private sector comes back and takes the baton. Additionally, private sector banks, despite the recent underperformance, present an intriguing opportunity due to their relatively low valuations compared to other sectors that have seen significant growth. Thus, the themes of women-centric initiatives, private sector capex, and undervalued private sector banks hold potential for investors.