I would say that the index is the best representative. In September and October, FIIs pulled out money in a big way. The market did not fall too much because domestic buying was continuously supporting it. Part of that money was because oil prices were rising then. But since then, there was uncertainty around the December 3rd results which was keeping a few of the FIIs on the sidelines but now the path is clear for them to come in.
Continuity of policy is one thing which this December 3 result has delivered because now the doubts around the government coming back to power have been put to ease. A lot of money was on the sidelines for three reasons: One was the uncertainty around the continuity of policy. The second was the rising oil price. Since then, we have seen Venezuelan oil has come in, restoring the supply situation. OPEC’s decision to cut the price does not seem to have found broad support. So oil is expected to be stable. Third, in the US, a rate cut is being strongly pitched in for the second half of the year.
So from that perspective, liquidity heading towards emerging markets should be running even higher. Also, because of the September-October selling, and the fact that domestic buying has been continuous, the share of FIIs in the total stock market in India has dropped, it is probably a 10-year low of 16.5%. So there is enough scope for everybody from a short-term FII to a longer-term FII to allocate more to India. And when that comes in, India is still perceived to be a risky country because of being part of the emerging market pack. So there is a search for safety.
When an FII comes to a risky market, he does not double down on his risk by getting into very strong cyclicals or small and midcaps, right. They tend to hug the index. The ETF flows from the foreigners in the last three years have been dominating flows into India. So from a perspective of the largecap space, it is best to stay around the index stocks and around largecap funds which have a small levy vis-à-vis the index because they can overweight some sectors a bit more.
But I would say that broad-based rally in largecaps – not market cap broad-based, but sectorally broad-based within the largecap space – would be the best strategy for investors to adopt. If they want to go beyond largecap funds, then flexi-cap funds represent a good option because they normally have 15-20% or maybe up to 30% in the broader market. They could give a good balance between the largecap growth and picking select good quality midcap stocks too.
Largecaps is where the action from the FIIs is largely going to come and perhaps looking for a slight bit of sanity when it comes to taking risk, perhaps that is what is going to push them in that direction. But broadly speaking, with the general elections in mind and the possibility of a slew of populist measures getting announced ahead of them, how should you strategise with the sectors that could get a leg up from now to the full onset of electioneering?
I think two sectors should dominate the short to medium term flows: One is consumption. Like you mentioned, populist measures. If you notice, one of the things behind Madhya Pradesh election was this “Ladli Behna.” In some way, it is populism but directed. I think similar schemes are likely to come from the centre also.
So consumption as a basket can be considered. So far, consumption has only shown growth at the premium level, that is higher end SUVs, seven lakhs and above, bigger houses, but the affordable housing, the entry level cars and scooters, festivals even saw a pickup in demand. But there is a lot to go for, because the full recovery post-Covid has not happened in the broad consumer goods segment. So with liquidity flowing in and populist measures, consumption in the past few months probably suffered capital at the cost of infra story. While the infra story will deliver in the medium term, in the short term, there is a valuation-based pickup in consumption because those EPS numbers come January results are going to show up well. I would say that is my number one pick.
The second pick following that would be the banking and financial services sector. Because of the fact that per capita income has been pretty healthy, population will lead to banks’ lending also going up. I know that there has been a bit of a dampener in terms of the capital adequacy required for retail loans. But good quality banks and NBFCs would easily absorb that in their stride and would show strong growth in market share and numbers. So banking as a sector because post the RBI regulation, there has been some profit booking there.
Good quality public sector banks have a large CASA base, they have a good reach across India, and hence the populist measures should ideally flow into deposits into the public sector banking system. So good quality public sector banks would probably take the lead. These would be my picks from an election and immediately thereafter perspective.
Consumption, banking and financials are the sectors you favour from an election standpoint, but there are lots of action in the primary markets. What do you do with the IPOs that have come our way already?
There is a simple thumb rule that I like to use, which is very simple. Is the capital being raised to fuel growth in their business or is the capital being raised to pay off the private equity and other players who had initially invested in those during a pre-IPO phase right. Because they had invested four or five years back, and their takeout is the stock market.
I would be wary of those because they are seeking to list the company in order to make their gains. That money is just passing from left hand to right hand. Whereas those companies that are raising capital to fuel their growth, even if a portion of this money is going to fuel their growth, are a better bet from an IPO view. So a simple thumb rule in IPOs, look for companies raising capital to fuel their own growth in the market space, either to gain market share, expand geographically outside, all of those kind of things.