Which way should FIIs look as Modi 3.0 takes charge at the Centre?
For export-oriented sectors such as Auto and Chemicals, global growth is improving on a long-term perspective. However, one needs to be careful about short-term uncertainties in the interest rate trajectory. The other key watch for the medium term is the outcome of the US Presidential election and how it influences the China-plus-one trend.
Highlights:
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- Signs of policy continuity in the allocation of ministries
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- FIIs can return to India because of waning policy uncertainty
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- US Presidential election can influence China Plus one
- Bottom-up approach remains key, given limited margin of safety in some pockets
The flow of funds continues to depict divergent trends as far as the Indian market is concerned. In June, FII outflows from the equity market so far is to the tune of Rs 9,438 crore, while DIIs have pumped in Rs 8,343 crore even after the huge redemption on June 4.
That said, post an outflow of about Rs 44,000 crore of foreign investors’ money in the last 70 odd days, FIIs may consider chipping in at the margin as the economy looks to be on a better footing.
As per the portfolio allocation in the new government, key ministries have been retained by the largest party – BJP, implying that the policy focus of the last Lok Sabha is likely to be sustained.
The full year’s Union budget is likely to offer further clarity on the policy focus, while some tweak in budgetary allocations is expected in favour of the social sector and the states of Bihar and Andhra. However, we believe fiscal consolidation will continue. The RBI surplus transfer to the tune of Rs 2.11 lakh crore provides cushion for the fiscal math. The dividend transfer announced recently by the RBI is two times the budget estimate and the excess amount accounts for nearly 0.6 percent of the GDP.
At the same time, the economic outlook is getting revised. S&P Global Ratings has upgraded India’s economic outlook to “positive” from “stable”, while the RBI has revised growth projection for FY25 to 7.2 percent from 7 percent.
Monetary policy & growth uncertainty in advanced economies rises
On the other hand, the inflation and growth trajectories in the US and Europe continue to wobble, resulting in indecisiveness among central banks. The latest non-farm payroll and wage-growth data from the US were better than expected, implying that the underlying demand environment remains steady and weakens the argument that inflation will soften sooner.
At the same time, while the ECB has started the rate-easing cycle, the next such action is not imminent as the central bank has upgraded its inflation forecast for 2025.
While we will get more cues from the upcoming Fed meet on June 12, the growing uncertainty in the interest rate/inflation/growth trajectory can bring back FIIs to countries with better growth and stable inflation dynamics.
Sector strategy implications
Notwithstanding the timing of FII inflows into equities, the local currency is expected to remain stable, partly aided by flows on the debt side. Passive flows into Indian G-secs due to the inclusion in the JP Morgan Government Bond Index should help.
For export-oriented sectors such as Auto and Chemicals, global growth is improving on a long-term perspective. However, one needs to be careful about short-term uncertainties in the interest rate trajectory. The other key watch for the medium term is the outcome of the US Presidential election and how it influences the China-plus-one trend.
Similarly, rural recovery is at a nascent stage. An expected normal monsoon along with policy push can help accelerate the recovery.
Sectors which were favoured in the last 1-2 years should continue to do well as the overarching theme of “Make in India” remains in focus.
That said, while choosing domestic manufacturing themes/stocks one should also consider supply-demand mismatch (cement, paints, renewables etc), moderation in order book (Railways), focus on value adds (Electronic manufacturing), and stock valuations. Our in-house Modi Index (consisting of stocks that benefited from policies in recent times) has recovered since the day of the election results but still way off from recent highs.
We believe valuations (margin of safety) remain the single-most important criteria – with or without the event risks seen recently. Therefore, we see the case for a re-jig in portfolio diversification at the margin towards defensives such as healthcare and select proxies for global growth.
Bymoneycontrol
