Equity markets this month have been significantly influenced by the latest quarterly earnings reports from corporates, the Indian festival season, and global economic trends. Attention was also on global oil benchmarks, brent crude. While geopolitical issues continue to exist, their effect on market trends has been minimal. The enduring strength of global markets remains a critical factor in maintaining the current positive market momentum.

Indian stock markets have increased by 7% in 2023, and have beaten other Asian & Emerging Market countries. Indian VIX, volatility index that looks at expected price swings in stocks, has fallen by about 25% this year - which is near its historical lows. With elections coming up next year for India , and also for the US, movement in Indian stock markets will be determined based on who is set to win.

The festive season has helped boost the economy over the last month or two. In October, there was a 13.4% year-over-year increase in GST collections, reaching Rs 1.72 trillion. This is the highest growth in the last 10 months, attributed to a rise in consumption during the festive season and improved compliance. Sales of passenger vehicles in October increased by 16.7% year-over-year, a significant rise from 5.1% in the previous month, driven by the festive demand. And sales of 2-3 wheelers also saw a substantial jump, with a 17.2% increase compared to just 2% growth in September. The generation of e-way bills in October hit a record high of nearly 10 crore, marking a 30.5% annual growth. This surge reflects increased movement of goods, boosted by festive activities and the upcoming wedding season.

The question is, how are How foreign portfolio investors & foreign institutional capital flowing through the Indian markets.

Foreign Institutional Investors Activity in November

In the second half of 2023, Foreign Institutional Investors (FIIs) have displayed a trend of selective sector investment in the Indian equity market. Foreign Institutional Investors recorded a net outflow of $169 million in the latest fortnight (1st November to 15th November), marking the 5th consecutive period of withdrawal. Despite this, the year 2023 has seen a substantial net inflow totaling $11.5 billion.

Sectors like Energy, Capital Goods, and Consumer Durables & Apparel also faced minor outflows. Let’s look at some specific sector wise performance and foreign investor flows:

Fortnightly Foreign Investor Flow

• Commercial and Professional Services sector experienced the largest inflow in the recent fortnight. Leading with a $612 million inflow, this sector has received consistent FII investments for the fourth fortnight in a row, benefiting companies like CAMS which saw a 25% increase in November.

• Healthcare sector's inflows of $136 million contrasted with a considerable outflow in the preceding fortnight.

• Consumer Services sector, which includes hospitality and leisure, has seen a steady flow of FII capital since May 2023, with FIIs increasing their stake from 2.3% in April to 3% in November. FII inflow was at $101 million.

• Sectors like Automobiles & Components, Financial Services & Utilities faced the highest outflows at $207 million, $188 million & $171 million, respectively. This is the 3rd consecutive period of outflow.

• Significant outflows were also noted in the Software & Services and FMCG sectors, continuing a negative trend since the start of October.

What are FIIs doing?

The trends highlight FII confidence in sectors tied to India's economic growth, such as Financial Services and Capital Goods. Latest data indicates varying FII stances relative to a global benchmark.

• FIIs are overweight in Financial Services, suggesting a bullish outlook.

• A marked underweight position in Energy, Software & Services, and FMCG reflects a cautious or bearish sentiment.

• The data also indicates a mixed sentiment among FIIs, with preference towards Commercial and Professional Services and caution in sectors like Automobiles & Components.

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What Have Foreign Investors Done in India in 2023?

Sector-wise Yearly Foreign Investor Flows

• Financial Services emerged as the favored sector with the highest inflow over the last 12 months, although the last 6 months saw a substantial inflow as well. With FIIs average weight hovering around 33% for the sector.

• Capital Goods and Automobiles & Components also attracted considerable FII funds. Seeing FII inflows of around $3,369 million & $1,499 million in the last 6 months.

• On the other hand, the Energy and Software & Services sectors have experienced substantial outflows, with $3,029 and $2,066 million, respectively. However, both have shown significant improvement, as outflow in the last 6 months has been considerably lower.

• Materials experienced a notable outflow in the last 6 months, despite a positive average weight.

• Commercial and Professional Services observed a moderate inflow in the last 6 months.

Overall, there has been a total investment inflow from FIIs as of November 2023 of $13.7 billion for the last 12 months and $10.3 billion for the last 6 months. As of September 2023, foreign investors had infused over $16 billion into Indian stocks which was quite substantial & the most significant net purchase in 3 years. This robust inflow contrasted sharply with the global selloff in August, where Indian markets were a notable exception as investors pulled back from almost all other Asian emerging markets. There were many factors at play:

China vs. India: Investor Confidence

While onshore Chinese stocks suffered record outflows, driven by unmet expectations for market-boosting measures and lingering concerns over a real estate crisis, India's market nearly tripled its value since the March 2020 equities low. It now ranks as the world's fifth-largest stock market, outpacing the US market, which has seen its capitalization roughly double over the same period.

Economic Challenges: Inflation and the Rupee

India faces inflationary pressures, with rising crude oil prices threatening to amplify the situation. The central bank is grappling with price surges in daily essentials, while the Indian rupee is near an all-time low, posing challenges for an export driven economy.

Political Events and Long-Term Prospects

The upcoming Indian general elections in 2024 is another variable that strategists believe could significantly impact the markets. Furthermore, India's long-term growth trajectory is contingent on its ability to enhance infrastructure, education, and job creation for its young workforce, especially in the face of challenges posed by the increasing use of artificial intelligence.

Scepticism Among Some Investors

Despite the inflow of foreign capital, some investors remain cautious. Some investors find that India needs to invest years worth of infrastructure and private-sector development to even come close to rivalling China’s investment portfolios. Does the retreat from Chinese investments automatically mean increased investment in India? Especially when we look at the disparity in the number of investable assets between India & China.

Foreign Investor Money is Leaving Chinese Stocks in 2023 - Why?

In the first 7 months of 2023, over 75% of foreign investment in China's stock market has been withdrawn, totaling more than $25 billion. This is a significant shift from the record buying that happened in January 2023, driven by expectations of economic recovery post the "zero-Covid" policy. However, concerns over the liquidity crisis in the real estate sector, underwhelming growth and lack of conviction from the Chinese government to take stringent fiscal & monetary policy measures to boost the economy have led to this mass sell-off. Long story short, foreign investors want the Chinese economy & market to be competitive - they want their investment to generate alpha - if they aren’t investors will withdraw and invest their capital in places that can give them better returns.

Foreign investors' net inflows to China's market have decreased by 77% since early August, reaching Rmb54.7bn. The CSI 300 index, which includes stocks listed in Shanghai and Shenzhen, has fallen over 11% in dollar terms this year. In contrast, markets in Japan, South Korea, and India have seen gains of 8 to 10%.

Financial institutions are now favoring markets in India and South Korea, with net inflows of $12.3bn and $6.4bn, respectively. Since 2019, this will be the first year that South Korea sees net foreign inflows. This is a significant shift from the previous trend of investing in Chinese stocks.

Analysts from Goldman Sachs predict a 17% rise in the CSI 300 by the end of 2024, driven by higher earnings and valuations of Chinese companies. Morgan Stanley strategists forecast a 7.5% gain for Chinese equities in the next 12 months but caution that further investment shifts away from China are possible if policymakers do not actively support growth.

Will India benefit as Foreign Investors retreat from Chinese stocks?

Experts such as Mark Mobius believe a significant shift in investment flows towards India is inevitable as China is experiencing a decline in foreign direct investments (FDI). There are increasing investment inflows into India, from both portfolio and private investments. Foreign investors have remained net buyers over the last 2 trading sessions buying up stocks worth Rs.2,626.20 cr according to NSE data. Domestic investors are also net buyers and have bought around Rs. 134.5 cr in the same period. And according to NSDL data, foreign investors have bought around Rs.96,349 cr Indian stocks in 2023.

Mark Mobius is of the opinion that India is set to receive funds that would typically be directed towards China. China's FDI inflows have decreased by 9.4% year-on-year to $136.4 billion in the first 10 months, according to the country’s commerce ministry.

In contrast, India’s foreign direct investment has increased significantly over the last 10-20 years. And despite foreign institutional investors being net sellers in October and November in India, the Indian economy has attracted over $10-$13 billion in FPI investments in 2023.

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Are Foreign Investors Bullish on India?

Bullishness to the Indian economy and the attractiveness of the Indian stock markets comes from our diversity, demographic advantages, creativity, young population, and fast technological adoption. Foreign investors are seeing India’s growth story as an attractive investment option with high ROIs (return on investment).

Strong Foreign Exchange Reserves

India's foreign exchange reserves have also seen a significant surge, increasing by $5.077 billion to a total of $595.397 billion, according to the latest data from RBI. The boost in reserves is attributed to various factors, such as robust foreign direct investment (FDI) inflows, steady foreign portfolio investments (FPI), and a positive balance of payments. Additionally, increased remittances from the Indian diaspora and favorable exchange rate trends have contributed to this growth.

Here’s a breakdown of various components of the reserves: Foreign Currency Assets (FCAs) increased by $4.39 billion to $526.39 billion, the Special Drawing Rights (SDRs) with the IMF rose by $120 million to $18.13 billion, and the Reserve Position in the IMF increased by $42 million to $4.83 billion. The gold reserves also saw an increase of $527 million, reaching $46.04 billion.

Adequate reserves will allow RBI to intervene in the foreign exchange market to stabilize the currency and reduce volatility. A comfortable level of foreign exchange reserves is crucial for India, particularly in meeting import requirements for essential commodities like oil and strategic imports. Such reserves help in mitigating the impact of external shocks and contribute to macroeconomic stability.

Increased Weightages for Indian Stocks in MSCI Emerging Markets Index

India's weightage on the MSCI Emerging Markets (EM) Index will increase to 16.3% from the current 15.88%, following the inclusion of 9 new stocks from 30th November onwards. India will have an all-time high of 131 stocks on the EM Index - number of Indian stocks tracked by the index has doubled in just 4 years.

Through 31 October of this year, India generated net returns of 4.75%, compared to a negative 2.14% return by the MSCI EM - which means India has outperformed the EM Index. Over a longer period of 10 years, India's annualized net returns stand at 8.33%, significantly higher than the MSCI EM's annualized returns of 1.19%. This strong performance places India second only to China in the EM index and ahead of other major economies like Taiwan, South Korea, and Brazil.

Increased representation of Indian stocks in the MSCI EM Index & other such inclusions in well tracked indices such as JP Morgan’s inclusion of Indian government bonds in its Emerging Market Bond Index have several implications.

• MSCI EM Index increase will likely result in an inflow of about $1.5 billion into the 9 Indian stocks included in the index, as well as into other Indian stocks whose weights will rise.

• Stocks like Zomato, Hindustan Aeronautics, and Jio Financial Services, which have seen increased weights, are expected to receive significant passive flows.

• However, some heavyweights like Reliance might experience minor weight reductions, potentially leading to outflows from these counters.

In terms of overall Foreign Portfolio Investment (FPI), the increase in India's weightage in the MSCI EM Index will primarily benefit passive trackers rather than active fund managers. While this does not necessarily mean an overall increase in foreign fund flows, it is certainly a positive signal for the market.

Why Is India Outperforming Other Emerging Market Countries In the MSCI EM Index?

Morgan Stanley recently upgrade India to the most preferred emerging market. India's performance in comparison to the MSCI Emerging Markets (EM) Index has been notably strong, especially from early 2021 until October 2022, where it outperformed the index by 45.5% in USD terms. This trend of outperformance is expected to continue, driven by several positive factors.

• Key among these factors is India's relative earnings per share (EPS) breakout versus the EM, coupled with a lower correlation/revenue exposure to US and China.

• Recent high-frequency trends further bolster the bullish outlook on India. Inflation concerns, which have been a global issue, are showing signs of easing in India.

• September Consumer Price Index (CPI) moderated to 5%, and the core CPI slowed further to 4.6%. This reduction in inflationary pressures suggests a more stable economic environment, potentially reducing the need for abrupt monetary policy changes.

• Trade balance is also improving, with a narrowing trade deficit and a sequentially improving service trade balance as of September which is a positive sign for the economy.

• India's economic indicators, such as projects under implementation and the Purchasing Managers' Index (PMI) for manufacturing, have shown positive trends. The PMI has remained in the expansionary zone since July 2021, likely driven by strong domestic demand amid broader external weaknesses.

Historically, India has also shown resilience in bear markets and outperforming the EM average by nearly 8% each year since 1997 in dollar terms. This long-term trend underscores India's ability to navigate economic downturns better than its EM peers.

What Sectors Are Foreign Investors Investing in India?

The shareholding pattern in the NSE500 index has seen notable changes recently. Foreign Institutional Investors (FIIs) and Mutual Funds (MFs) have increased their holdings in the top 500 companies listed on the National Stock Exchange, while promoters have reduced their holdings across different market capitalizations.

• FIIs are particularly focused on private banks, with a reduced stake in HDFC Bank from 16.2% to 12.7% in six months, shifting their investments slightly towards ICICI Bank and SBI. They continue to be underweight on capital goods stocks. Despite the decrease in HDFC Bank, FII holdings in large caps remain significantly higher at 22.6% compared to midcaps (13.8%).

• Domestic mutual funds are overweight on PSU banks, NBFCs, capital goods, and pharma sectors, while being underweight on IT, private banks, FMCG, paints, and Reliance. They have an average stake of 9-10% across different market cap categories and have shown a particular interest in the best midcap and top small cap companies in 2023 .

• Conversely, individuals' stake has remained stable at around 8.8%, with a higher inclination towards small-cap stocks.

This shift in ownership indicates a growing confidence among foreign investors and mutual funds in the Indian equity market, particularly in sectors like Financial Services and IT. The trend also reflects a strategic shift in investment patterns, favoring sectors with potential for growth and diversification.

The India Growth Story - How Far Can We Get?

JP Morgan expects India to become the third-largest economy by 2027 and expects its size to double to $7 trillion by 2030. Mark Mobius is bullish on the Indian stock market, predicting that the Sensex could reach 100,000 in the next 5 years. He also ranks India second in country exposure in his company’s concentrated investment portfolio which has yielded significant returns in recent years. So what are large foreign investors expecting from India?

• JP Morgan Research expects Indian exports to more than double from just under $500 billion today to over $1 trillion. Manufacturing is expected to play a crucial role, with its contribution to India's GDP anticipated to rise from 17% to nearly 25%. India is moving towards a more manufacturing-driven growth model.

• IMF raised its 2023-24 GDP growth forecast to 6.3% for India for the 2nd time in 3 months, aligning it closer to the 6.5% predicted by Indian authorities.

• Barclay's report echoes a similar sentiment, stating that India would need to target an eight percent growth rate to overtake China as the biggest driver of global growth. According to Barclay’s analysts, India's growth has outperformed the rest of the world, maintaining robust expansion with relatively low inflation. They expect India to achieve at least six percent GDP growth while maintaining broad macro stability.

• Consumer demand within India remains strong. The e-commerce segment in India is witnessing solid consumer demand, particularly during the festive months , despite weak demands in other sectors.

Overall, the structural factors supporting India's economy, combined with recent positive economic trends, contribute to the sustained bullish outlook on India. The country's economic resilience, improving trade dynamics, easing inflation concerns, and strong domestic demand are key drivers behind this optimistic view. The question is, are you bullish on India? Do you believe in the India growth story?

We are bullish on the India Growth Story. We have been doing this for over 4 years, with 25,000+ investors and Rs. 300cr+ AUA (Assets Under Advisory). Here's a look at our New India smallcase's return performance (in % terms) New India Portfolio against its benchmark, Smallcap Index is -

Over a 3 year horizon, ₹1 Lac invested would have become -

Here are the key performance metrics of the New India Smallcase against its benchmark, the Smallcap Index -

Read the full article on Wright Research, Are Foreign Investors Bullish On India? Will Foreign Portfolio Investors (FPIs) Invest In The India

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