India's one of the most crowded trades for FIIs, says Sandeep Bhatia

There is a notable shift in global perception of India, Sandeep Bhatia said, as it is now seen as a rising star, reflecting growing international admiration

With the US Federal Reserve’s (Fed’s) meeting outcome now known, all eyes are on the Reserve Bank of India to cut rates. Puneet Wadhwa caught up with SANDEEP BHATIA, managing director and head of equity India at Macquarie Capital in Mumbai, to discuss his views on the road ahead for global equity markets. There is a notable shift in global perception of India, he said, as it is now seen as a rising star, reflecting growing international admiration. Edited excerpts:

The next big global event after the Fed’s rate stance is the US election outcome. How are the markets preparing for it?

The US elections are very tightly poised. What once appeared to be an easy win for the Republicans shifted with the announcement of a new candidate. In the short term, both candidates are promising significant increases in spending without corresponding tax policies, which might initially boost the global economy and US markets. However, the US has been running a high fiscal deficit of around 6 per cent despite strong macroeconomic tailwinds over the past eight years. In the longer term, these increased expenditures could have negative repercussions for both US and global financial markets.

Is the Indian stock market ripe for a sharp correction?

It is unlikely that the anticipated market correction will happen anytime soon. In fact, during past pressures on small and midcap stocks, domestic mutual funds emerged as strong buyers. If there is a correction, both foreign institutional investors (FIIs) and domestic investors are likely to step in, making it hard to see a prolonged downturn unless something unexpected occurs.

I firmly believe India is one of the few nations capable of shaping its destiny, much like the US in terms of autonomy. Historically, India has faced major challenges — energy dependence, infrastructure gaps, and a lack of skilled labour — that have constrained growth. However, improvements are underway. India’s large domestic market and ongoing reforms position it to benefit in this de-globalising world.

Why is it time to believe in the ‘India story’? What is different now?

The notable change is the shift in global perception of India; it’s now seen as a rising star, reflecting growing international admiration. Another shift is India’s increased self-confidence and resilience to external shocks, particularly in the equity markets.

India’s economy has remained strong amid the ongoing geopolitical situation. A key factor in this resilience is the growing investment of India’s domestic savings into financial assets. Since the late 1990s, India’s substantial savings weren’t fully invested in the stock market. Despite perceptions of high retail participation, actual numbers remain modest, helping to shield the market from external shocks even as global views on India improve.

But one had the impression that FIIs were losing interest in India given their recent flows into the stock market.

FIIs are exploring other markets due to India’s rising valuations, which have widened the valuation gap. While it may not be accurate to say they’ve lost interest, they are considering other attractive options. Despite this, India continues to grow significantly.

Rebalances in MSA and FTSE highlight India’s increasing global market share. With the largest population and a steady growth rate of 6.5-7 per cent, along with expected nominal earnings growth of around 10 per cent, India remains an appealing market.

Which top three markets are the go-to destinations for FIIs?

Historically, China has been the preferred market for many investors, and there was renewed interest in early 2024, with hopes for change. However, we’re now witnessing an exit from China.

Currently, India has become one of the most crowded trades for FIIs. It’s a market that seems to be in a holding pattern, waiting for a major correction. Investors have piled into India, but there is ongoing anticipation for a potential shift or adjustment in market dynamics.

Is there a gap between the current state of the markets and the economy?

The relationship between markets and the economy is typically long-term, rather than aligning on a daily, monthly, or even yearly basis. Markets often anticipate future economic conditions and may reflect expectations about India’s economic outlook in the near term. However, markets can adjust or correct quickly based on new information or changes. It is also important to note that sudden shifts are possible, though not necessarily the expected outcome.

How do you see the demand scenario playing out for India Inc and its impact on corporate earnings growth?

After the pandemic, four-wheeler sales experienced a strong run, so the current inventory build-up doesn’t necessarily reflect weak demand. The real softness has been observed in consumer staples, where broader consumption hasn’t picked up. With consumer staples underperforming for an extended period, there’s increasing interest in that sector now. While some automotive stocks face inventory issues, consumer staples may be poised for recovery after two and a half years of weakness. Overall, growth remains at 6.5-7 per cent, and the shift from one sector to another does not indicate fundamental concerns about the macroeconomic picture.