FII flows will return to normalcy in medium-term, says Mihir Vora, TRUST MF

Foreign institutional investors are selling equities across the world, not just India, said Mihir Vora, CIO, TRUST Mutual Fund, in an email interaction with Business Standard

Foreign institutional investors are selling equities across the world, not just India, said Mihir Vora, CIO, TRUST Mutual Fund, in an email interaction with Shivam Tyagi. He said that the of strength US dollar as well as expectations of US corporations doing well under the Trump regime are making FIIs net sellers, however, in the medium term it is expected US Dollar strength will plateau, bringing foreign flows back to normalcy and markets to continue the uptrend. Edited excerpts:

 

What according to you is the near to mid-term outlook for the Indian market?

After a stellar run over the past 12 months, we have seen a healthy correction and the market stands at crucial support levels. 

 

There are global tailwinds, with expectations that the US economy will continue to grow well and that the US Federal reserve will continue to keep monetary policy benign. On the other hand, China continues to struggle with growth. 

 

On the domestic front there are mixed signals. Rural demand is stabilising after a prolonged post-COVID weakness, while urban demand appears to be peaking. On the positive side, primary sales seem to be picking up in the festival season and we expect Government spending, which was sluggish in the first half, to pick up significantly in the second half. So, the next few weeks will be important but volatile. In the medium term, we expect the US Dollar strength to plateau, bringing foreign flows back to normalcy and markets to continue the uptrend. The India growth story remains intact.

 

After Donald Trump’s comeback, do you think there is a highlight for the Indian market or will it be more of the same?

There are expectations that Trump tax cuts, US fiscal spending and potential import tariffs will accelerate the momentum of US business investments and consumer spending, which could potentially help Indian exports and IT services. In the short-term, however, this is causing global investment flows to get diverted to the US markets and US bond yields to rise, resulting in a strong dollar. Thus, emerging markets including India are facing outflows and are under pressure.

 

When do you expect RBI to cut the rate considering the Fed’s recent cut?

The US Fed has already cut interest rates by 75 bps in this cycle in spite of strong growth and employment. The US election outcome is inflationary in the long term. So, markets are now pricing in lower rate cuts in the US. In India inflation has been sticky and is keeping headline inflation higher than RBIs target. However, there are also some signs of a slowdown and so we expect RBI to reduce rates by 25 bps in February as food inflation will moderate by then. Overall we think it will be a shallow rate cut cycle of 50-75 bps.

 

The FIIs are continuing their selling, what do you think is worrying the foreign investors in the Indian market?

The key reason for FII outflows (from all global markets, not only India) is the US dollar strength and expectations of US corporations doing well under the Trump regime. Moreover, we also need to see the bigger picture, which is that India also received massive inflows in June-September – almost $14 billion, out of which 10 flowed out in October. The other big fact is that FII flows are flat now for the calendar year, domestic institutionalpurchases are a staggering $57 billion so far this year. The market is well supported by flows.

 

Do you see this correction continuing if yes for how long?

The US election has created a flutter, but things should stabilise before year-end. November also sees many global fund managers reduce risk and exposure as the yearly targets are met. We have seen concentrated FII selling and this should stop soon, lending stability to global markets.

 

Are there any sectors that have become attractive during this time?

We are bullish on three broad themes: rising income levels, physical asset creation and technological disruption. Rising income levels means that growth rates of segments catering to premium consumption will be higher. Some examples are premium vehicles, premium real estate, jewellery, consumer durables, hotels, airlines etc. It also means that segments that

cater to financial savings will grow faster – insurance, wealth management, asset management, broking, exchanges, depositories, registrars, distributors of financial services and products etc. 

 

Physical asset creation includes sectors like real estate, capital goods, construction, infrastructure, power, defence, railways. However, in the recent few quarters, banks, finance companies,chemicals, defence have corrected more and have underperformed. These also offer a good balance of growth and valuation.