Flows to Indian equities are at risk as investors eye China: Chris Wood

Flows to Indian equity markets are at a risk as investors increase their fund allocation to China, wrote Christopher Wood, global head of equity strategy at Jefferies in his weekly note to investors, GREED & fear. That said, he believes India remains the best long-term equity story in Asian and the emerging market (EM) context.

In this backdrop, Investors, he said, are exiting consumer discretionary stocks instead of selling banks, which he said seems to be the right strategy as banks appear more attractive on a relative basis. The Nifty Bank Index, he wrote, is now trading at 13.7x 12-month forward earnings, compared with 18.6x for the Nifty Index.

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"It is widely acknowledged that India remains at risk tactically because of the need to fund increased positions in China but there is widespread agreement that India remains the best long-term equity story in the Asia and emerging market context. To deal with this conundrum, investors seem to be reducing exposure to high PE Indian consumer discretionary stocks rather than reducing core bank holdings. This makes sense to GREED & fear, most particularly as Indian banks are looking cheap relative to the Indian market," Wood said.

At the macro level, analysts at ICICI Securities suggest that foreign portfolio investors’ holding of Indian stocks at 17 per cent as in January is at a multi-year low. This, they believe, could bottom out soon.

"On an aggregate basis, the FPI holding of Indian stocks stands at Rs 47.9 trillion as on January 15, 2023 23, which is 17 per cent of the aggregate market cap of the listed space in India. FPI holding of Indian stocks hit a multi-year low of around 17 per cent in June 2022 and have since hovered around that mark, which could be a sign of a bottom formation in terms of their holdings. Outlook for FPI flows towards EMs in general – and India in particular – remains conducive given relatively higher growth and rising probability of an end to the aggressive quantitative tightening (QT) cycle. However, relatively higher valuations compared to other EMs is a key constraint," wrote Vinod Karki and Niraj Karnani of ICICI Securities in a recent note.

Meanwhile, at the bourses, most consumer discretionary stocks have lost ground in the last six months. While the Nifty FMCG index has performed in line with the benchmark index – the Nifty50 – with a gain of 4.2 per cent since July 2022, stocks such as Tata Consumer Products and Colgate-Palmolive (India) have slipped over 8 per cent during this period

Procter & Gamble Hygiene, Emami and Dabur India, too, have lost over 6 per cent during this period. Varun Beverages, Britannia, ITC, Radico Khaitan and Godrej Consumer, on the other hand, stayed afloat with a gain ranging between 7 - 41 per cent, ACE Equity data showed.

According to analysts at Kotak Securities, a combination of factors, including a slowdown in new hiring, the waning of pent-up demand, high inflation sapping household savings, and an increase in mortgage EMIs, have impacted demand across consumer discretionary categories.

The Nifty Bank index, on the other hand, surged nearly 11 per cent in the last six months and has outperformed Nifty FMCG and the Nifty 50 indexes. Punjab National Bank (PNB), IDFC First Bank, Bank of Baroda, The Federal Bank, Axis Bank and HDFC Bank gained between 14 per cent and 72 per cent during this period, data showed.