If Samvat 2066 saw Indian markets stage a spectacular rally, the party will continue in the new year, with foreign institutional investors (FIIs) continuing to shovel money into here, says the consensus among participants.
India Infoline expects FII flows to touch $35 billion (Rs 1.55 lakh crore) in the current financial year, compared with $20 bn (Rs 88,000 crore) in the year just gone by. “The outlook for markets is positive, as corporate earnings will remain positive. We are hopeful the Indian investor will return to markets in the new Samvat,” said Helios Capital head, Samir Arora.
Anand Shah, head of equity, Canara Rebeco Mutual Fund, said FII flows were likely to continue, given that India is an inward-focused economy and not as exposed as China to exports or as commodity-dependent as Russia or Brazil. Analysts said with a 500-basis point difference in 10-year yields in the US and India, a strengthening rupee and a strongly growing economy will ensure money will come in.
“Though domestic investors might find the markets expensive, lack of options and India’s unique position means external investors are likely to invest, albeit at a slower pace,” said a fund manager.
Consumption is the key theme in most advisories of fund managers and broking houses. Says Gandotra: “The benefits of India’s favourable demographics and rising incomes is likely to be reflected in buoyant consumption demand.”
Though the segment has been an underperformer up to now, given the delay in project execution, experts were bullish on infrastructure. “The government’s focus on infrastructure as well as corporate expansion will ensure that construction plays are likely to see growth in order books and a rise in revenues,” says Arora.
Reforms are the other theme money managers are bullish on. Arora believes investors could see upsides in the oil & gas space if diesel prices are deregulated and subsidies reduced. Clarity in mining policy and an increase in the FII limit in sectors such as retail and airlines could help stocks move up, believe analysts.
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However, it’s not roses all the way and expectations were muted on returns. While liquidity is strong, experts said a lot depends on earnings upgrades and investors will have to moderate their returns’ expectations from these levels. Many believe the positives are already fully priced in and significant appreciation from present levels are unlikely for the broader markets.
While the bulls are banking on earnings upgrades, based on improving demand and higher volumes, analysts are worried about inflation, which can eat into the gains. “Given the high raw material costs, it will be difficult for companies to maintain margins. India Inc will grow, but the pace will not be as much as in recent quarters,” said an analyst.
Vikas Khemani, head of institutional equities at Edelweiss, said any negative surprise on fund flows and oil prices could seriously hurt Indian markets. Given current valuations, wealth managers advise retail investors to exit from risky bets and stick to large caps over the next year.