FII inflows slow down in August; here’s what to expect from Dalal Street now

Inflows from foreign institutional investors (FIIs) into the domestic equity markets have slowed sharply in August. The benchmark BSE Sensex has lost over 2 per cent till August 25. Data available with Ace Equity shows that FIIs have poured around Rs 10,690 crore so far in August against an inflow of more than Rs 40,000 crore every month since May. Will these inflows by global investors decline further in the coming months? And where is the domestic equity market headed? In an interaction with Business Today Umeshkumar Mehta, CIO of SAMCO Mutual Fund, shares his insights. Edited excerpts:

BT: Are you extremely bullish, bullish, neutral, bearish or extremely bearish for the rest of the months of FY24?

UM: Being an election year, stock markets may witness short-term volatility and uncertainty. Given that election results often bring policy reforms and initiatives that can impact specific sectors and industries, industries and investors alike are hesitant to commit funds for the short term. It is expected that benchmark indices would trade in a narrow range on a positive bias.

BT: What key concerns do you think could lead to further correction in the market?

UM: Increasing commodity prices: Inflated commodity prices, especially crude, exert downward pressure on profit margins, diminishing corporate earnings and dampening investors’ sentiment. This escalation in input costs erodes stock market confidence and can lead to a retreat in stock valuations.

Interest rate hikes: Central banks across the globe are raising interest rates which have already tightened borrowing costs for businesses, curbing their expansion plans and reducing profitability, consequently casting a shadow of uncertainty over the market's growth prospects. This shift in the interest rate landscape may trigger investors to re-evaluate their portfolios, potentially prompting a downward correction in stock prices.

Escalation of war: Investor sentiment could be adversely affected by any diplomatic or military incident, such as a potential escalation in the Ukraine-Russia conflict giving rise to an uncertain environment.

BT: And what are the key positives that could push the markets to fresh highs?

UM: Interest rate cuts: Post such a sudden and sharp interest rate rise, any strategic interest rate cut going ahead would inject a renewed sense of confidence back into the stock market, stimulating investor optimism and potentially fuelling an upward trajectory in stock prices. By lowering borrowing costs, these rate cuts could also incentivise businesses to invest and expand, contributing to enhanced corporate performance and overall market growth.

Truce between Russia and Ukraine: Any agreement between warring neighbours, Russia and Ukraine, could serve as a catalyst for improved geopolitical stability, potentially bolstering investor sentiment and paving the way for a positive uptick in the stock market. Reduced geopolitical tensions would create a conducive environment across nations, translating into increased market confidence and in turn potential for enhanced investment returns.

China and Europe plus one: India stands poised to capitalise on the shifting global manufacturing landscape, potentially driving a favourable impact on the equity market, as an increasing number of manufacturers seek alternative production bases beyond China and Europe. This strategic shift would aid India's economic growth and attract heightened investor interest, contributing to potential gains.

BT: How do you see the trend of FPI flows in the coming seven months?

UM: Over the last five months, foreign portfolio investors (FPIs) have continuously invested in Indian equities, accumulating a total of over $15bn for this calendar year. Where global economies have been witnessing challenges of slower growth, elevated inflation and fears of recession, India, on the other hand, against the backdrop of stable government policies, robust macro fundamentals, stable inflation, have sustainable growth rates. Even China’s economy hit some breaks, pushing investors to rely on other emerging countries such as India for better return opportunities. Accordingly, the recent upturn in FPI flows may be sustained.    

BT: Suggest three factors that may deliver good returns to investors. Why?

UM: IT: The information technology (IT) sector has underperformed in the last 15-18 months and in such a period, earnings have grown and that effectively suggests valuations in the sector across the board have moderated by 20 per cent-30 per cent. Valuations, comparatively, have become far more reasonable. In the next 6-12 months, when the environment in the US settles down and the Fed starts talking about easing of interest rates, IT would be a beneficiary, in a big way.

Banking: The Indian banking sector appears to be in a much better shape when compared to a decade back. After a long hiatus, we have seen resilient credit growth in the sector as a whole because of the revival of the investment cycle from the private sector and public equally. Post improvement in margins last year on the back of increased interest rate, effective credit demand would help the sector take the lead.

BT: Which sectors should one avoid right now?

UM: Specialty chemical manufacturers are witnessing grim prospects in the near term, led by fragile global demand and the destocking of inventory. Re-opening of the Chinese economy has increased competition and has led to the decline in chemical prices and in turn margin compression for Indian chemical players. Further, one more catalyst behind this negative impact is a widespread disturbance in global chemical demand, attributed to noticeable economic deceleration in advanced European and the US markets.

BT: How do you see domestic equity markets in the medium-to-long term?

UM: In the latest quarter, headline index companies met projected earnings expectations. Reduced headwinds like lower commodity prices and improved supply chains create a favourable environment for future earnings growth. The robust balance sheets of Indian companies, marked by a multi-year low in leverage, would enable them to invest in capital expenditures and cater to rising demand.

The continued steady flow of savings through Systematic Investment Plan (SIP) investments from retail investors is especially promising. This suggests that equities are evolving into a fundamental asset for the broader population, so the ongoing interest from both domestic and foreign investors furnishes a strong base for market stability and possible expansion.