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China's loss is India's gain

July 14, 2023 09:00 IST

'As China’s reopening euphoria fizzled out on the back of some disappointing economic data, we saw inflows coming back to India with full force in the past 3-4 months.'


Illustration: Uttam Ghosh/

The Indian markets have seen a sharp rebound from this year’s lows in March but valuations have still not been in the very expensive territory, says Kunal Vora, head, India equity research, BNP Paribas.

In an interview with Sundar Sethuraman, he explains what is fuelling the strong overseas flows and fundamental factors supporting the market at the current levels.

Domestic equities are witnessing huge foreign portfolio investor (FPI) flows. What’s driving these inflows?

In March 2023, we changed our view on the markets from being cautious to positive.

Our rationale was that the market had seen price and time correction and crude and commodity costs had softened.


We saw resilience in corporate earnings, led by financials and we were approaching the fag end of this rate-hike cycle.

FPI holdings in India were at the lowest level in almost a decade while the market outlook was improving.

Overall, the market had become more attractive in March, and subsequently, we saw a rally.

We believe that some of these factors may have contributed to the strong inflows we have seen since March.

Despite the strong rally, India is still underperforming most major markets.

Bond yield-earnings yield gap is at 1.6 per cent, which is only slightly higher than the long-term average.

This is because while the equity markets have recovered since March, bond yields have cooled off.

What has been the impact of China’s reopening on FPI flows to India?

At the start of the year, we expected volatility in FPI flows into India, which is likely to continue as FPIs chase lower valuations in underperforming markets and asset classes, like China and Europe.

We had seen this panning out, with India seeing substantial outflows in January-February, coinciding with strong inflows into the onshore China market.

However, as China’s reopening euphoria fizzled out on the back of some disappointing economic data, we saw inflows coming back to India with full force in the past 3-4 months.

Flows into India are one of the highest among major emerging markets (EMs).

In addition, India’s macro outlook has improved significantly with the fall in crude and commodities prices and lower inflationary pressure.

This has made India a preferred investors’ choice within EMs.

How do you see valuations at this juncture?

Markets have seen a sharp rally in recent months due to which near-term consolidation cannot be ruled out, though the downside risks remain limited.

We expect resilient systematic investment plan (SIP) flows, and still, multi-year low FII holdings in the Indian equities market will likely support the market.

Do you expect the rally in mid- and small-cap stocks to continue? Has valuation comfort waned there too?

We have seen a sharp rally in the mid- and small-cap space in the past 2-3 months, on the back of strong FPI and domestic flows. However, on-ground outlook has not changed much.

Taking note of slowing global demand, elevated valuations in many sectors, slowdown in retail flows and lack of major catalysts, we remain cautious on the overall indices’ returns.

However, on a bottom-up approach, we continue to prefer companies with low-downside risks to the earnings.

When do you expect the rate hikes to peak in the West?

Our team continues to expect a 25 basis points (bps) rate hike at the July FOMC meet, and an extended pause thereafter for the rest of the year. In the face of decelerating economic activity, the lagged effects of previous rate hikes and tightening lending conditions are poised to show up more forcefully in H2 of 2023.

Globally, the situation remains quite volatile as the future rates trajectory will be determined by the incoming data on inflation, labour market conditions and consumer spending.

What's your assessment of the corporate earnings in FY23? What is your earnings forecast for FY24?

Corporate earnings in FY23 had largely come in line with Street expectations.

Throughout the year, we witnessed a resilient Nifty EPS with limited downgrades.

This is contrary to what we have seen in the past, with the major downgrades seen particularly in globally-linked sectors, including IT.

In FY24, bulk of the Nifty’s earnings’ growth is expected to come from sectors that are linked to investment and consumption demand.

These are mainly financials, autos (likely on a low base) and materials (again on a low base).

Sundar Sethuraman
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