MC Interview: With peak global economic uncertainty, FIIs may remain cautious about India allocation, says Nitin Bhasin of Ambit

Overall, FII investment in Indian equities in CY24 was an outflow of US$ 0.8 billion. With peak global economic uncertainty, FIIs may remain cautious about India allocation, though largecap valuations has moderated. GDP growth differential between India and EM (Emerging Markets) will bottom out in 2025, and till the time investors’ attention is on CY25, flows can remain muted. Once, the investor attention shifts to CY26 in second half of this year that will be the time when we will be more constructive on FII flows.

Most experts have advised avoiding externally driven sectors and focusing more on domestically focused sectors. Do you strongly agree?

Global policy uncertainty index is at all-time high driven by escalating trade tensions and US tariffs. Despite external uncertainties, India is expected to grow in the range of 6-6.25 percent YoY in FY26, and would be the fastest growing EM.

Growth would be driven mostly by domestic drivers such as private consumption led by rural and urban high-ticket segments. Agriculture sector witnessed its fastest growth in 4 quarters (Q3FY25) and is expected to maintain its momentum in the upcoming rabi harvest. This should provide a boost to mass consumption products such as FMCG. Similarly, continued growth of Global Capability Centres (GCCs) has provided a new leg of high value added services exports and should provide further impetus to consumption as GCC employees tend to be better paid than most formal sector urban jobs.

Now, do you think the equity market will shift its focus from tariff updates to Q4 and FY25 earnings, along with management commentaries for FY26?

Yes, earnings would be most important variable going ahead once tariff uncertainty is behind. It is a stock picker’s market. While aggregate profit growth remains reasonable, polarization is increasing! In Q3FY25, while Nifty profit growth was still at 13 percent, select few companies are driving it, 32 percent of Nifty companies witnessed a decline in profits, highest since pandemic.

Market returns are also following a similar pattern. Divergence between NSE500 and the median stock has widened significantly in Q4FY25, with median stock lagging the index by 6.5 percent! Stock market concentration is increasing! It is a stock picker’s market. Follow the earnings, invest in companies with best earnings revision/ earnings momentum!

Are you advising caution in the specialty chemicals space, considering the potential competition from China?

China, given its size, will always be a risk to Indian Chemical companies. This risk is more pronounced during the down cycles. Concerns on China capacity and higher dumping were there in the previous down cycle as well (2018-20). Risk from China is usually higher for basic chemical companies as they have higher share of spot business and are more prone to market headwinds. Specialty chemical companies, unlike basic chemical companies, usually operate on contractual business models.

We think the operational deliveries of specialty chemical companies should gradually improve especially for those with a) customer centric business models (CMO/CDMO), and b) products catering to niche applications. Therefore, we are not worried about prospects of specialty chemical space going ahead.

Do you see valuation comfort in mid-caps and small-caps after the steep correction?

Small-caps and mid-caps continue to trade at expensive valuations! On TTM PE, small and mid-cap trade at 41 percent and 21 percent premium to 7-year average. On 12-month forward basis, they trade at 25 percent and 3 percent premium to 7- year average.

The growth is slowing down and multiple expansion become the primary driver of returns in 9MCY24. CY24 marked the 9th consecutive year of positive annual returns for Sensex, which is the longest run since 1985. However, everything is a cycle and the markets are no different. We are in the phase of rise in stock market concentration, where small and mid-caps underperform large-caps.

Do you think domestic growth has bottomed out, and there will be a gradual recovery going forward?

India’s real GDP growth over the last 30 years has averaged 6.3 percent, with post-pandemic pent up demand driving growth expansion over the last three years. Currently, Indian economy is undergoing a period of cyclical moderation, with growth expected to settle around 6.0-6.25 percent in FY25/26.

Recovery thus far, has been uneven with pockets of resilience in the absence of broad-basing in growth drivers. For instance, signs of demand pick up are discernible in rural demand amid positive farm outlook and cooling food prices. Urban demand has been muted so far, but should see gradual recovery in discretionary consumption with easing in macro prudential tightening and upside from tax exemptions. Further rate cuts alongside easing liquidity conditions should improve transmission and aid demand recovery (mass consumption).

Potential risks that could derail growth recovery include government capex push for core infrastructure fizzling out as tax revenues slow, forgoing the strong multiplier impact. Global uncertainties, such as tariff threats from the US and competition from Chinese imports, and prolonged slump in demand could keep private investors on the fence for longer.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.