However, FIIs may flock to Dalal Street sooner than later as India remains one of the highest growth emerging markets despite a lower-than-expected mandate to Prime Minister Narendra Modi. Brokerages say despite BJP failing to get full majority, continuity of power is a powerful enough narrative to support the economy and even the markets.
“Global investors haven’t got much choice but to remain invested in India and perhaps increase allocations despite the political uncertainty. India is the fastest-growing large economy today and is likely to remain so in the foreseeable future. The valuation premium had run up beyond rational levels and hence some correction in valuations in the near term cannot be ruled out,” says Aditya Khemka of InCred Asset Management.
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Here are 3 reasons why FIIs may soon turn buyers:
1) Underweight positioning
After recent selling, foreign investors are not overweight India in any significant dimension. Many FIIs who are waiting on the sidelines in risk-off mode could quickly flood the Street once the new government’s policies are clearer.
“The best is yet to come for FII investments, as net equity flows as a percentage of market capitalization over the last ten years have averaged well below 0.5%, much lower than the 2003-2007 average of 2.5%. Moreover, the inclusion of Indian government bonds in global indices is expected to attract foreign capital inflows worth $100 billion over the next three years,” said Hitesh Jain of YES Securities.
Kislay Upadhyay, smallcase Manager and Founder at FidelFolio, sees an inflow of Rs 1.5 lakh crore over the next 5-6 months.
2) China factor
The recent reversal of “Buy India and sell China” policy in the last one-and-a-half months could be a temporary phenomenon.
“I think FIIs realise that India is the future. They have already seen that China has problems and they want to diversify away from China. Some of these FIIs who have been badly burned in China, do not even want to go back to China, that is probably a mistake because China is still a viable market. But nevertheless, India is going to benefit from the desire of FIIs to diversify and that is very important,” says billionaire investor Mark Mobius.
3) Economic fundamentals
Market experts point out given the fact that as India’s GDP growth and fiscal consolidation path remain intact, global investors will allocate more funds.
“With Modi at the helm, it seems likely the next phase of economic development will proceed and the long-term investment case for India, for now, remains solid,” says Amol Gogate, fund manager of Carmignac Portfolio Emerging Discovery.
Global brokerage Bernstein’s Venugopal Garre said while some focus on subsidies at the expense of capex is likely, material impact is unlikely in the near term. Team Bernstein has retained a view of high single-digit returns, with the Nifty target unchanged at 23,500.
Experts are hoping that the government will be able to implement its promises as listed in the manifesto, but any chatter of key allies not supporting this agenda and having a common minimum programme would be disturbing for markets in general, especially FIIs.
“Formation of cabinet & presentation of budget would be important from that point of view for the markets over the next few days & weeks,” Rakesh Parekh, MD and Co-Head, Portfolio Management Services, JM Financial, says.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of The Economic Times)