Foreign portfolio flows are poised to return to India in the second half of the year, according to a note from top brokerage Jefferies. The note indicates that foreign institutional investors are now seeking new investment opportunities in sectors such as real estate, capital goods, and public sector undertakings (PSUs).
Jefferies highlighted a growing interest among investors in India, fueled by the country’s projected 7% GDP growth and a market capitalization target of $5 trillion.
Are Valuation Of Indian Companies a concern?
The brokerage observes that emerging market funds are currently “neutral” to slightly “underweight” on India due to high valuations, recent election-related volatility, and an increase in the country’s weightage in global indices.
So far in 2024, foreign portfolio investors (FPIs) have sold shares worth Rs 1.27 lakh crore, while domestic institutional investors (DIIs) have been net buyers, injecting Rs 2.29 lakh crore into Indian equities. A potential rate cut by the US Federal Reserve later in the year could be a key trigger for increased FPI inflows into India.
Jefferies estimates that the relative positioning of FPIs is now close to neutral, compared to the approximately 2 percentage points overweight they have traditionally maintained.
Which sectors are looking attractive ?
Foreign investors are showing interest beyond the traditional large-cap sectors such as banking, IT, and consumption stocks. Jefferies’ recommendation to overweight cyclicals and real estate has gained traction among foreign institutional investors (FIIs).
“Interestingly, FPIs seem more keen to invest in ‘consumption’ driven capex themes such as residential real estate, airports, hotels, and malls, with a good appetite to invest in small and mid-cap names in this space,” Jefferies stated.
The brokerage also noted that in the all-cap non-US global indices, India’s weight is 5.9%, but in the international small and midcap benchmark, it is higher at 8.5%, driven by a significant rally in broader market names in 2024.
While valuation remains a concern, Jefferies suggested that a potential slowdown in domestic retail flows—some of which may be unsustainable—could create entry opportunities for FPIs.
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