When you speak to your clients, some of your peers and some of your counterparts what is the sense you are getting in terms of the liquidity outlook because time and again, we go back to that same comparison, India versus China, China versus India? China was attractive, China will be attractive and China will remain attractive. India was expensive, India is expensive, but will remain expensive. Then why do we debate this because this is history and this is future.
I think the reason is that China is still a pretty big market. And I think the debate is obviously that, will China be able to do something more meaningful to be able to kind of change sentiment over there? Sentiment towards India and compared to what sentiment is towards China, it cannot be more divergent.I mean, people seem to have completely given up on China. On the other hand, sentiment towards India is super positive. But that is also in a way reflected in valuations. I mean, China is very, very attractive on a valuation basis but that is versus history and a lot of people argue that that is not relevant.
I think this will be the fifth or sixth month of continuous positive flows from foreigners. And what has been very encouraging, particularly for the month of July that we looked at, that a significant proportion of flows that came into India were through India dedicated funds.
So, in fact, India dedicated foreign funds make up only 6% of the total FII AUM. However, they contributed 40% of the FII inflow that came into India during the month of July.
If sentiment towards China does not change, we are now seeing money coming not through the EM basket. Now, imagine 94% of the FII AUM still is not India dedicated, that is either EM or some global fund, etc. so, there is not really investors putting directly money into it. That could start changing.
And that I think anyways is the longer term story, has that started happening, is the question. But clearly, I think what remains, what is difficult to predict, is what will be the Chinese policymakers, what will they be doing?
And I think all eyes will be around the time when rains are over, that is in the last quarter of this year, if there is something more significant as a stimulus because if that happens, then even the colour of stocks, which start doing well in India will change. And perhaps India will not outperform if there is a more believable and large stimulus, even though it might have absolute upside still for India.
But we need to be careful if that happens, then a lot of the stocks that are currently not being doing well, like things in the commodity space in India could start doing much better.
So, I think that is really going to be a crucial thing to watch out for, even from a global perspective, and will also have an impact on sentiment on India on a relative basis.
So, you know, maybe sometime around October, November is when we should be looking at that more closely.
What about the outlook when it comes to the rural theme? Do you believe that it has already played out or that there is still a lot more promise when it comes to rural stocks, especially when it comes to their financial metrics?
I think at this point of time, we still do not have conclusive evidence. We have had some positive commentary by companies in certain pockets here and there, positive in the sense encouraging, I would say, but nothing very conclusive that says that rural as a theme is back and is kind of now improving.
Now, I do hear a lot of people drawing a parallel that going into the election period, typically rural should do well. However, what I would want to also nuance that by is that, yes, I mean, historically, that might have been the case but if you were to look at earlier governments, none of them in the more recent past have been so supply-side focused in their policymaking.
There have been very limited demand side measures that the government has done. Even the recent budget did not have a lot of direct demand side measures.
So, is this election period going to be similar like other election periods and could have short-term relief for rural? That is something which I would not want to simply draw a parallel to earlier election periods, given this difference, which is a clear, important nuance to focus on. So, I would say, I still do not have any conclusive evidence to kind of give you an answer either ways on that one.
How far are we away from a real bounce in IT? The world is divided on old business, new business. What is your understanding?
Yes, I think IT and banks are clearly the two things that you need to get your calls right otherwise it is very tough to outperform. We have been a bit lucky in getting that call right over the last two and a half, three years that is why our India-focused portfolio has done pretty well.
I would say, I am still in the camp that the recent recovery that IT stocks have seen have now again taken their valuations to levels which are not very attractive as compared to that the other large sector, which is banks, is something where valuations are, in general, attractive compared to that sector.
So, within the two, I still prefer banks. For IT, I believe it is just a long de-rating period, which started with early 2022. And just to kind of remind you at that point of time when valuations went to plus three standard deviation to historical average, that was a point when everybody thought that this sector has changed forever after Covid because technology has become so important, et cetera.
And when something becomes so expensive one way, the de-rating period can also be, particularly when we have very good quality stocks, they do not really collapse in a matter of months.
The de-rating period generally is longer, which involves correction of multiples. Yes, a few of them have become a little bit better in terms of valuation but the sector in general is still not attractive from a simple valuations perspective.