First of all, how are you viewing the election outcome? What are your predictions or analysis on this? There is some pressure on the benchmark indices and broader markets ahead of the election. Could this pressure intensify post-earnings given the lack of support from FIIs? What are your expectations from the election outcome?
The recent pressure on the benchmark indices this week isn’t primarily due to concerns about the election results. There’s a broad consensus that the BJP will secure a simple majority. The debate is more about the exact number of seats. The final outcome will be known on June 4th. The recent market dip is more related to broader Asia selling off as US yields hit 4.6% on the 10-year, and the dollar index reached 105, although it moderated slightly when the US first quarter GDP annualized came in at 1.3% instead of 1.6%. This was more about US macroeconomic factors driving an Asia equity selloff rather than concerns about the Indian election results, as seen in the Nifty and Sensex over the past few days. How do you see the FII positioning right now? From the F&O data, we see that their long positions are around 13%, just above the all-time low of 14%. Do you think a positive election outcome could be a significant booster for FIIs to return, or will valuation gaps, especially in emerging markets like China, keep them away from the Indian market?
Chinese valuations are roughly half of India’s, but Chinese earnings growth is also significantly lower. The China trade is more tactical and opportunistic. We’ve seen massive outflows from China ETFs. FIIs are positioned cautiously because, unlike domestic investors who are largely confined to India due to capital controls, FIIs have the entire world as their playground. FIIs are currently at an 11-year low in terms of their holdings in NSE 500 stocks. I think they will return once there is clear political stability, but global macro factors, such as interest rates and Fed policy, will play a bigger role in determining FII participation than the election results. If the BJP secures a majority, this is largely priced in by domestic investors, but not necessarily by foreign investors. A major political upset could change the dynamics, but macroeconomic cues will still be crucial for significant FII inflows.
Looking ahead, if the current government gets a third term, which key themes or sectors do you think will attract the most interest? The government has previously focused on capex, defence, and railways. Will these themes continue, or are there new opportunities that investors should consider?
Thematic focus on infrastructure, defence, renewable energy, and real estate will likely continue, similar to the period from 2003 to 2008. As FIIs return, large-cap private sector banks should see valuation support, which has been missing recently due to various external and domestic regulatory reasons. Additionally, we might see interest in discretionary consumption and premiumization, as well as non-lending financials like brokers, rating agencies, and exchanges. These financial intermediaries, along with large-cap private sector banks, are due for a valuation re-rating.FIIs have historically been interested in the IT sector. Despite recent underwhelming earnings, do you see any green shoots in IT that investors should consider, or does the sector have a long way to go before it becomes attractive again?
The IT industry is closely tied to the US economic cycle. Currently, the US is experiencing a soft landing with a 1.3% GDP growth rate in Q1. There’s a slowdown, but not necessarily a recession. AI and other innovations are providing tailwinds, but we’ve seen periodic concerns about Indian IT before. The sector will bounce back, especially once US rate cuts begin again. IT encompasses various segments, including service companies, BPOs, and KPOs serving financial and mortgage sectors in the US and Europe. These cyclical plays will influence IT revenue and clarity. I’m not bearish on IT, but I’m not particularly bullish in a relative sense either. I recommend focusing on large-cap indices and sectors like large-cap private sector banks, which seem undervalued.
The NSE recently launched a new index related to the EV theme. The government is focusing on this area, although penetration levels are currently low. What are your views on the growth potential and investment opportunities in the electric vehicle sector?
The electric vehicle (EV) sector in India is in its early stages. India sells about one-tenth the number of cars as China, and within that, one-tenth the number of EVs. So, the opportunity is enormous. As charging infrastructure develops and battery costs decrease, the market will grow significantly. However, the government aims to balance green transition with reducing dependency on imported materials, especially from China. This policy might slow the transition occasionally, as seen with Tesla’s near-entry into India. Despite potential hurdles, I’m very bullish on the EV sector. It will see new winners, and the leaders in conventional vehicles may not dominate the EV market. The sector has a long runway, and indigenization efforts will shape its growth trajectory.