The domestic markets have staged an impressive recovery from Jun-22 lows and have also outperformed their global peers handsomely in past months.
The catalyst for this revival is sustained improvement in domestic economic factors amid benign and volatile global macro. The growth fuelled by a resilient economy is underpinned by the government's sustained focus on improving manufacturing goods share in exports, infrastructure spending, 'Make in India' and various fiscal measures to aid in growth.
The positive impact of policies has been visible gradually over the past few months and more prominently in the latest quarter where corporates have posted decent results and fast-moving economic data like GST collections, PMI, electricity consumption, etc., also points to an improving domestic outlook.
With strong macro and corporate fundamentals and a reasonable valuation, there has been a marked improvement in foreign portfolio equity flows into Indian equities since late July 2022.
As the fundamental, valuation and domestic liquidity situation has already been favourable for Indian equities, the turnaround in the sentiments of foreign portfolio investors is a major positive development for Indian equities.
FIIs deployed almost $7 billion in Indian stocks in August which is the highest monthly inflow among major emerging markets. Also, August marked the highest monthly inflows from overseas investors into Indian equities since December 2020, after a record streak of outflows amounting to a $35 billion foreign exodus, equal to 1% of market cap, since October.
On a sectoral basis, the FIIs preferred rate-sensitive financials, pharma and discretionary, manufacturing and staples amid strong growth and moderating input costs after declining in inflation intensity.
The sustainability of overseas flows looks promising and no near-term signs are visible for them to change for now as India is positioned attractively in terms of risk and reward compared to other global markets, especially China, where zero covid induced lockdowns continue to add volatility.
Coming to the global share in long-term portfolio allocations, India’s share is still benign with sovereign wealth funds with an AUM (assets under management) of $74 billion accounting for just 1% in weight toward Indian equities followed by pension funds at assets worth $51 billion has just 0.5% weighted allocation.
On the other hand, domestic flows also remain strong on the back of healthy and growing retail participation both direct and indirect through mutual funds and the SIP route. The domestic retail flows through SIP stood at ₹126.9 billion in August which is an all-time high with a SIP AUM of ₹6.4 trillion.
The strong traction is expected to continue as equities attract an increasingly larger share in domestic savings going ahead.
Coming to the valuations, the current valuations for the broader markets are in balance and neither too high nor too low with stock-specific opportunities available in most pockets.
Also, looking at the long-term growth runway for both domestic and export, India is the fifth largest economy and still has a very benign share in merchandise exports of manufactured goods.
The government has set an initial target of 10% share which implies more than double of existing. If the target is to be achieved in five years, it implies a CAGR (compound annual growth rate) of 15%. Hence, many businesses could grow at sustainable higher rates for the next few years, which should instil enough confidence in investors towards investment in equities for the long term.
Narendra Solanki is the head of fundamental research at Anand Rathi Share & Stock Brokers
Disclaimer: The views and recommendations given in this article are of the analyst. These do not represent the views of MintGenie.
