The recent spike in US bond yields is a key factor that would weigh in on FPI flows. Attractive US bond yields reduces the incentive to invest in emerging markets, resulting in FPI selling across emerging markets in the past few weeks. Higher interest rates can put pressure on the FPI inflows, and a “near-term price/time correction cannot be ruled out,” Kunal Vora, Head - India Equity Research, BNP Paribas India, told businessline. Edited excerpts:
What’s in store for H2-FY24 for equity investors? Do you think the market will stabilise at the current level or should one brace for further turbulence given the global headwinds?
After remaining cautious throughout last year, we had turned positive on equities in March this year, as we saw macro factors turning favourable and valuations supportive.
Globally, the recent spike in US bond yields is a factor to watch out for, as this can weigh on the FPI flows; however, India’s dependence on FPI flows has reduced considerably. Election results will be another key factor to watch out for. While we believe that near-term price/time correction cannot be ruled out, after a sharp rally seen from April to mid-September, a sizeable sell-off is unlikely as domestic flows remain strong and FPI holdings are still close to multi-year low.
What will be the strategy of FPIs? Will they continue to sell in Indian markets?
India has been a consistent recipient of FPI flows, with net inflows in eight out of last 10 years. In 2022, FPI sold $17 billion in Indian equities, but we have witnessed a strong turnaround with a net inflow of $23 billion during March-August 2023. Despite the selling in the last few weeks, FPIs have been significant buyers in Indian equities YTD. Over the last one month, we have seen US 10-year bond yields spike to 4.6 per cent. Attractive US bond yields reduces the incentive to invest in emerging markets and we have seen this play out in last few weeks with FPI selling across emerging markets. In the near term, higher interest rates can put pressure on the FPI inflows but we do not see any structural issues.
Mid- and small-cap space has been running freely despite wide expectations of correction… your views?
The mid-cap and small-cap have seen a sharp rally after the underperformance seen in CY22. Nifty Small 100 and Nifty Midcap 100 are up 3 per cent and 29 per cent respectively, YTD in CY23. This is well above Nifty50, which is up 8.5 per cent YTD in CY23. The recent rally has pushed Nifty Midcap 100 valuations to trade at a 25 per cent premium over Nifty50, compared with the long-term average of 4 per cent. We prefer large-caps and see opportunity in sectors such as financial services.
Which themes will play out, given the general and assembly elections are around the corner?
We recently published a report on the affluent India theme. Over FY12-21, we have seen a 5x increase in the number of individuals that have reported gross income of over ₹10 lakh per annum. Along with the increase in income, we have also seen a significant increase in retail lending by banks. Confluence of higher income and higher credit availability has boosted the propensity to spend as well as invest for these households. Sectors that are better aligned with the affluent consumption theme include autos (four-wheelers), financial services, jewellery, hotels, real estate, cigarettes, multiplexes and hospitals. We see some interesting opportunities in these sectors and many of our stock picks are aligned with this theme. On the other hand, we believe growth could remain weak in mass-market consumption categories such as FMCG, two-wheelers, media broadcasting and other rural plays. We are underweight on some of these sectors.
What will be the impact of the current Israel-Gaza situation on the markets?
For the equity market, geopolitical issues have an impact when macro variables change because of them. Despite the issues in West Asia, crude is slightly lower compared with where it was a month ago and so far we do not see any major implications for Indian equities from the current situation.