Correction may bring in foreign flows: Jefferies’ Wood 

Foreign investors will view any significant correction as an opportunity to add Indian equities, Jefferies’ Christopher Wood said in his weekly newsletter GREED & fear.

• Also read:Mid-cap valuations, China trade key risks for the market: Jefferies’ Wood

A combination of India’s outperformance in recent quarters and high valuations, most particularly in the mid-cap space, has meant that most dedicated emerging market investors are no longer overweight the market. Foreign investors have been net sold $3.98 billion of Indian equities so far in 2024, after buying $21.4 billion in 2023.

Stay safe on mid-caps

Wood said the RBI has room to cut rates if necessary as the real policy repo rate, deflated by CPI inflation, is now 1.6 per cent. Expressing surprise that the market had not fallen more in recent days, Wood said the risk of further corrections remains greatest in the mid-cap space. The Nifty MidCap 100 Index now trades at 30.7x one-year forward earnings, compared with 19.7x for the Nifty.

“There will be a temptation for investors to tilt the portfolio more towards consumption plays, relative to investment plays, on the view that the incoming government will focus more on populist measures whereas a feature of the past 10 years has been a fiscal deficit driven by spending on physical infrastructure rather than transfer payments. The obvious possibility here is measures to revive the rural economy,” he said.

Domestic equity mutual funds’ net inflow has risen from ₹15,600 crore ($1.9 billion) per month in 2023 to ₹28,000 crore ($3.4 billion) per month in the first four months of 2024.

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Wood has reduced his weighting in public sector companies in the long-only India portfolio as he sees reduced prospects of reforms for state-owned enterprises and public sector divestment, give constraints posed by a coalition government.