India offers both quantity and quality gains: Nilesh Shah says foreign investors looking to enter

Nilesh Shah recommends that investors shouldn't invest on a six month or a yearly basis, but play for a long term.

As the domestic market soared to fresh record highs, cheering the saffron sweep across state elections, Kotak AMC’s Nilesh Shah remains extremely bullish on the Indian growth story. As the country sits on the cusp of a pivotal election, Nilesh Shah shares his perspective with Moneycontrol on the trajectory of the equity market, changing dynamics for FIIs, along with shedding light on India’s positive momentum.

The market is pleasantly surprised. They were discounting continuity of governance in 2024 general election but these three results give confidence to the market that their hypothesis was correct. The second quarter GDP number came ahead of expectations; analysts didn't downgrade earnings thereafter like in the previous periods. Earnings as per expectations, GDP growth ahead of expectations, plus political continuity hypothesis getting reconfirmed is why markets gave a thumbs up today.

Momentum is in favour of India. Concerns about the Indian market is about valuation rather than growth. Between 2027 to 2032, India will become the third largest economy overtaking both Germany and Japan. The conundrum: one-year basis, India looks expensive to emerging market peers; five-year basis, India is probably the cheapest emerging market.

There is consensus that growth in India is guaranteed. Valuation -- each one will have to take a call independently. Remember, gold will always be available at the price of gold; not at the price of copper.

Also Read | Uncertain private sector forecast due to struggling middle-class consumption, says Saurabh Mukherjea

I think there will be some urgency in the capex plan for private investment as the election uncertainty starts. Economically, the capacity utilisation is reaching peak level, corporate cash flow is strong and leverage is low. There's no better time than today to set up additional capacity. Now, of course, it will be sector specific, such as automobiles sector may be more aggressive, while the chemicals sector might be more subdued.

Foreign portfolio investors are not a homogeneous crowd. There are FPIs who have been present in India for decades and won’t change their plan. There are also FIIs who offloaded their positions between 2021-22, and are waiting on the side, hoping to buy at a lower level. However, now they will have to jump in at the current level.

Also Read | Earnings upgrades for beverage industry seen over next 2-3 years: Andrew Holland

There's also a set of global investors who invested in China but are now realising that Indian markets have given far higher returns. Also, from a growth point of view, it looks far better than China. So there will be a reallocation trade happening from China to India over a period of time.

Finally, India is also working with benchmark global indices companies to increase its weight. On a correction, every global investor will be looking to enhance their allocation to India, just like a domestic investor.

Undoubtedly, FPI's ownership in listed equity has fallen to the lowest level. This is driven by the fact that around $140 billion of investments in the unlisted private space is dominated majorly by FIIs. To truly understand, we have to combine listed and unlisted spaces to understand foreigners’ ownership in Indian companies. We must also look at foreign direct investment, which is increasing. I still believe global capital will continue to flood into India as long as we provide them with an attractive opportunity to invest in India.