ETMarkets Smart Talk: FIIs holding in India stocks is at decadal low after 2 years of outflow: Ajay Vora

In an interview with ETMarkets, Vora said: “We expect FIIs to come back to India in a strong way as earnings growth remains much better than other emerging markets and India can continue to command premium valuations” Edited excerpts:

We hit fresh record highs earlier in June. What is your outlook on markets?

India is relatively well placed versus all large economies as our nominal GDP growth is still around 11-12% which is much better than other markets.

After the recent 12% rally from the March 2023 lows, we can see some retracement/consolidation but the uptrend remains intact given the strong earnings growth trajectory.

Interesting trend in MFs! We have seen SIP money inching towards Rs 15000 cr in May – it does reflect the maturity of retail investors. But will the trend continue?
In the last 2 years, we have seen DIIs pumping in USD 25 bn p.a. mainly due to sharp rise in SIP book. But if we look at the overall allocation by retail to Equities, it is only 3.5% of their annual savings.

Indian Household savings in a year is USD 700 bn but only 3% is being channelized to equity markets.

If we compare this with other developed markets where the number is in double digits, we are way behind in terms of equity penetration. This inflow trend can continue as more and more people experience the compounding magic. Rates are on hold in US and India. What is the trajectory you foresee soon and how will it impact equity markets?
We believe rates have peaked out globally and going forward we can see a slow drift down in rates in India as well. Growth across the world has collapsed and rates would also follow with a lag.

Equity markets tend to do well in a falling rate environment and with better growth prospects India should outperform.

What is happening in China? Are slowdown fears more real there? Is there any takeaway for India or the metal sector?
Chinese economy is struggling to come back to normal after Covid. PBOC has been trying to stimulate the pump the economy for the last 3-6 months and the recent action on rate cut has added to the stimulus provided to the economy.

Given the strong focus on Infra, metals tend to do well whenever Chinese economy does well.

FIIs are slowly moving back to Indian markets. But will the trend continue as valuations are no longer cheap as compared to other EMs?
FIIs have pumped USD 11 bn in the last 4 months in India, after selling nearly USD 60 bn in the last 2 years. FIIs holding in Indian stocks is at a decadal low after the last 2 years of outflow.

We expect FIIs to come back to India in a strong way as earnings growth remains much better than other emerging markets and India can continue to command premium valuations.

Which sectors are you overweight and underweight on?
We continue to like the Banking sector given that rates have peaked and credit growth remains strong. The worst of asset quality is behind us and valuations are still reasonable.

Consumer discretionary is another sector where we are positive as formalization of the economy will continue to stimulate job growth and enhance disposable income.

We are Neutral on IT as growth concerns remain across the sector on the back of the US slowdown. However, we believe that the worst of the earnings downgrade is behind us and will look to get more constructive at the right time.

How should investors play the small & midcap theme in 2H2023?
We are very positive about the mid and small-cap space considering their underperformance over the last 3 years and strong growth outlook.

There are few very strong themes underplaying which can become really large over the next 3-5 years.

Strong GST numbers are a testimony to how the economy is formalizing and smaller companies are able to grow at a much faster pace. Investors should look to increase their allocation in this space with a 3–5-year horizon.

How do you pick stocks for your portfolio? What are the filters that you use?
Most important factor to evaluate while investing is to assess the management quality and nature of the business.

Additionally, we also have to analyze other factors like free cash flow generation, capital allocation and eventually return ratios like Return on Equity and Invested Capital.

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