Indian Equities Poised to Benefit from Global Investor Sentiment.

Synopsis

Elevated multiples raise portfolio risk even as growing demand for Indian equities by foreign investors may keep leading indices resilient in an uncertain world.

The Nifty 50 exchange-traded fund (ETF) has been introduced by investment firm Blackrock Japan in India. ETFs and other passive funds are becoming the preferred option for investing in Indian equities, surpassing other formats. In March 2024, the India-focused funds registered abroad got inflows of $2.3 billion, with the US-listed funds accounting for the majority of the inflows at $1.6 billion, according to a recent analysis by Kotak Institutional Equities on tracking foreign fund flows.

According to the research, the percentage of India allocated to global developing market funds increased from approximately 14% in March 2024 to 18.3% in March 2024. Additionally, throughout this time, money flows into global developing market exchange-traded funds (ETFs) were positive while those into non-ETFs were negative.

To put this in perspective, the largest net flows of almost US$6.8 billion from domestic institutional investors into Indian equities occurred in March 2024.

This data emphasises two things: first, more international investors are selecting to put money into Indian stocks; and second, a larger percentage of these investors favour investing passively through exchange-traded funds (ETFs).

One important lesson to learn from this is that, based solely on demand, the 50 largest stocks in terms of market capitalization, which comprise the Nifty 50 index, will most likely witness significant increases in their market capitalization in the upcoming months and years. As a result, the Indian equities markets' liquidity may be able to counteract investor apprehension stemming from present prices and maintain favourable market returns.

Global investor fund movements pose a risk to domestic equities due to the rise of exchange-traded funds (ETFs). However, it appears that investors' preferences are currently just starting to migrate away from China and towards India.

What does this entail for investors in the country?

Still, the ETFs continue to see a significant movement. According to the Kotak Institutional report's India Dedicated Fund Flow chart, inflows into these exchange-traded funds (ETFs) increased from less than US$100 million in March 2023 to approximately US $1.6 billion in March 2024. The amount of money flowing into non-ETF funds decreased concurrently.

It is evident that foreign investors are becoming less comfortable with actively investing in Indian stocks and are instead choosing to allocate through exchange-traded funds (ETFs) that represent the nation's overall economic prospects. This implies they may be placing bets on strengthening macroeconomic conditions for our economy, which might support rising business profits, consumer spending, and infrastructure development.

An additional analysis reveals a preference for the consumption-led basics and discretionary sectors. It is possible to deduce that there is hope for a steady improvement in resident Indians' purchasing power, which will eventually translate into increased company profits.

This assurance could stem from growing foreign direct investment (FDI) into India, our favourable demographics, and the nation's infrastructure progress.

In real terms, rising investor demand will maintain the robustness of our frontline indices throughout periods of instability in the global markets. This implies that we will probably continue to trade at high multiples going forward, which increases the risk associated with stocks. Lastly, because there are now diversified pockets of buying and because both domestic and international ETFs are continuously growing in size, equities that are particularly part of the Nifty 50 index are likely to remain fairly protected in times of market decline.

If fund managers stay near to the index during these periods, they should be able to achieve high returns as frontline stocks climb. In contrast, a value manager might exercise greater caution because to the risks associated with abruptly increased liquidity and the possibility that the above-average prices could return to the mean.

Retail investors in the country should keep up their steady investments since there would be a beneficial windfall due to the growing demand for Indian equities.

Author : Prayas Sarkar, MBA Finance

Post Graduate Programme of Financial Markets

NISM VA, NCFM Capital Market Dealer Module