Stock market: Will Fed rate cuts bring FPI inflows? Stocks that may perform well

FPI inflows to India are likely to accelerate if the Fed easing cycle triggers a risk-on rally in the US, Emkay Global said in its latest strategy note. This foreign flows may create enough momentum to protect against downsides, even if valuations cap the upside for the broader stock market, the brokerage added.

The domestic brokerage said FPIs have largely missed the bus so far, but they are now willing to look through elevated valuations and increase their India exposure. Data available with NSDL suggests FPIs bought Rs 33,281 worth stocks in September so far. 

"FPI net inflows in India for 2024 stand at Rs 42,300 crore (0.2 per cent of the Nifty m-cap) compared with the Rs 1.7 lakh crore (1.2 per cent of the Nifty m-cap) in 2023, indicating that there is room for acceleration going forward," the brokerage said.

Emkay said the US 10-year treasury peaked ten months ago, and the 37 per cent NSE-500 rally since is the strongest compared with previous peaks. This is also true for the US equity markets. 

"Our view is that the impact of the rate cuts on the broader markets, therefore, is likely to be limited. Select sectors may do well, but only if there is a second-order impact on earnings," it said.

Among sectors, Emkay said banks have, atypically, underperformed the broader market after the turn in the bond market cycle. This, it said, reinforces its view that lenders are undergoing a structural adjustment in valuations due to lower growth, and are not the best play on falling rates. 

"In the short term, adverse ALM implies upfront margin pressures when the easing cycle starts. Banks may see a relief rally due to short-term improvement in liquidity and improved deposit growth; we see this as an opportunity to lighten our positions and maintain our underweight stance," it said.

On the other hand, autos and real estate typically benefit during an easing cycle, but they have already shown significant outperformance. 

"While we believe there is still potential for growth in these sectors, it may be more focused on individual stocks rather than the sectors as a whole," Emkay Global said.

It said high-growth companies in times of easing rate cycle often experience a rerating, which benefits the IT and FMCG sectors. But these sectors have also seen a surge of late, making their valuations less appealing now, Emkay said.

"We are observing initial signs of a revival in mass and rural consumption, despite the overall weak demand. This assessment is informed by management insights, Nielsen trends, increased welfare spending by states post elections, and decreasing inflation. Conversely, premium consumption is facing challenges, likely due to tighter unsecured credit and job losses in white-collar sectors during the second half of FY24," it said. 

Emkay said one should capitalise on this trend, particularly in the FMCG sector, despite high valuations, as value retail is likely to benefit going ahead.

On Thursday, Sensex rose 236.57 points or 0.29 per cent to settle at 83,184.80. Nifty stood at 25,415.80, up 38.25 points or 0.15 per cent.