Nothing succeeds like success. Money begets money. These two sayings sum up the Indian story.

It has been a dream run! India has been the best-performing large market in the world for the past 25 years, even in US Dollar terms. The only index with returns close to India is the Nasdaq, a higher-risk index with tech and innovation-led companies.

Even more starkly, since pre-Covid levels, India and Indian small stocks have done better than all markets. This is despite India having done the least fiscal and monetary stimulus among all the large economies in the world. Indian stocks are up 1.5 to 2x while China is down 33%.

What explains the phenomenal performance?

India always had structural positives of the three Ds: Democracy, Demographics, and De-Regulation of industry. These helped Indian GDP and per-capita income levels grow from USD 500 to over USD 2600, a rise of 450% in USD terms in 30 years. Moreover, in the past few years, these have become even more important and stronger for India versus the rest of the world. Let us see how and why.

Democracy. In the past 20 years, we have seen several countries regress to become more radical while many have transitioned to dictatorships. China has become more authoritarian and less transparent. Democracy has been weakened in many ways. Against this backdrop, India shines as one of the truly functioning democracies with many shared values with the developed economies. After the Covid experiences and the belligerence of non-democratic countries recently, global investors are considering only India as a relevant large emerging market along with Brazil and Indonesia.

Demographics. India has the strongest demographic profile. India will add 20% of the working-age population of the world in the next 10 years, and India will add 20% of the world’s incremental GDP. China, Europe, and Japan will see a reduction in workforce sizes while there will be no growth in the US! China’s working-age population has peaked.

Agencies

De-Regulation. The reforms that ended the license permit Raj in 1991 have continued, and many more pro-business steps have been introduced since then. Reduced corporate tax for fresh investments, the introduction of GST, simplification of the process to file returns, etc. have considerably helped the organized sector. The introduction of production-linked incentive schemes for many critical sectors is kick-starting private and foreign investment into the manufacturing sector. The bankruptcy code and the NCLT process, inflation targeting by the RBI, direct benefit transfers, and Gati Shakti for logistics are all steps for a better business environment. Local and foreign investors and corporations appreciate this, and we are seeing a continuous improvement in direct investment flows.

While the three Ds continue to improve, the past few years have given us four more Ds in competitive advantage, providing further tailwinds to the growth story: Digitization, Diversification, (low) Debt, and Dynamism.Digitization. India has leapfrogged many technologies. We skipped the landline penetration story and went straight to mobiles and now 5G networks at the lowest cost in the world. We may skip the deep-hydrocarbon age and leapfrog to renewables and green-hydrogen ecosystems. The JAM (Jandhan Aadhar Mobile) ecosystem, along with UPI are pure Indian innovations that are going a long way to bring down finance transaction costs and help revolutionize financial inclusion. These technologies help delivery of social and government services and subsidies to the targeted individual without cost or leakages. These platforms are now being eyed by other countries.

Diversification: (of the global manufacturing base). The global supply-chain disruptions during Covid awakened the world to the dominance of China in manufacturing and highlighted the fact that it has total control over many critical minerals, products, chemicals, and pharmaceutical ingredients. The world recognized the imperative to have a diverse supply base. The tensions in Taiwan and India and the USA’s involvement in the Pacific created a further urgency to move at least some portion of manufacturing away from China. While countries like Vietnam, and Mexico have been gainers so far, only India has the required size of labor pool and the added benefit of a large domestic market. Combined with the Government’s PLI and other incentives we have already begun to see many large multinationals and local companies announce significant plans to manufacture in India.

The opportunity for India is limitless. To give a perspective, China’s manufacturing base is USD 5 Trillion, the US base is 2.5 trillion, while India is about USD 0.5 Trillion – just 10% of China and 20% of the US. China has a 75-100% share in many goods. So even if 10% of production needs to shift out from China, it means an addition of one India in output!

This year while India continues to attract Foreign Direct Investment (FDI), net FDI flows for China have turned negative for the first time as flows from abroad slowed down to a trickle and Chinese firms’ outbound investments accelerated. This indicates that even Chinese companies are looking to take money out.

Debt. India is carrying low levels of debt. It has low financial leverage at the country level, company level as well as the household level. India as a country has amongst the least levels of external debt. Households have traditionally been averse to debt (because of risk-averseness as well as due to unavailability of easy credit) and corporate India (especially large corporates) has continued to reduce debt over the past 7 years. So, all the players in the economy have adequate resources to invest and expand as needed. This is in stark contrast with the rest of the world which is neck-deep in debt. The Indian banking system has done a commendable job of cleaning up its balance sheets and banks as well as finance companies are adequately capitalized. This sets up a sound foundation for the financial system to fund a secular period of growth.

Dynamism. In the past 10 years, entrepreneurial dynamism has been unleashed at a scale not seen before in our history. The growth of venture capital and private equity as well as local alternate investment funds (AIFs) has been exponential. As the economy has expanded, the numbers of the wealthy have grown. Family offices, high-networth individuals, and institutions have far more risk capital than ever before. The start-up ecosystem is thriving and ideas and concepts are getting funding. This has decisively changed the mindset of the youth and failure is no longer considered taboo. We will see far more innovation from India than before and we hope to see the emergence of global-scale innovative companies from India.

In the past few years, as private sector investment was faltering, the Government stepped up by spending on infrastructure and other productive areas. There is a strong thrust towards make-in-India and Atmanirbharta (self-reliance) in critical areas. These have helped keep up the economic momentum. In the short term, there may be bumps as the post-Covid recovery has still been K-shaped in nature and the lower-income segments have still to fully emerge. The global economy is on a weaker footing than it was pre-Covid and the impact of Covid stimulus is wearing off in the Western world.

However, if we take the medium to long-term view, all in all, India is in a sweet spot. India has the demand to grow, the capacity to produce, the domestic market to offer scale, and the geopolitical position to attract global investments – almost like there-is-no-option (TINA) to India.

India today has a proven long-term track record of economic performance, stock market performance, democracy, and the rule of law. Nothing succeeds like success, and we see global interest in India at an all-time high. India’s relative position in the world has never been better. As we keep performing, India’s weight in the benchmarks will keep increasing and investors will by default have to allocate more money to India – money begets money!

The stars are aligned for the next two decades to be called India’s decades!

( is the Chief Investment Officer at TRUST AMC. Views are own)

While every end of a year is equal to the beginning of another year, the beginning of a year is not necessarily the same as the end of that year. The Indian stock market at the beginning of 2023 was a complete contrast to where it stands now at the end of the year. When we walked into 2023, activities in both the primary and secondary markets were down and out. Most IPOs were pushed out and the secondary market was flittering. At that point, no one could have predicted that the close of the year would see one of the highest market levels with very robust primary markets activities. The number of IPO documents now getting filed each day and the IPOs advertised on the front page of business newspapers are unprecedented.

One of the much talked about interesting trends for the year is a significant reduction in the Foreign Institutional Investors (FIIs) holding in our markets. At present, of the total Indian market cap of US$~4.33trillion, FII holding is US$~656billion or ~15%. This will be one of the lowest FII holdings in our stock markets in the last 10 years plus. To put it in context, in 2012 the FII holding was ~25%. Despite this, our markets are at an all-time high. This is being attributed to another major trend of increased domestic flows. The domestic retail and institutional investors’ holding has moved from ~25% in 2012 to ~36% now. The domestic flows have increased significantly, more specifically through the Mutual Funds route.

With an all-time low FII holding, and an all-time high market, the question that comes up is are we finally decoupled from FIIs flows? Are our markets now no longer dependent on foreign flows? On the face of it, a positive answer sounds apparently logical. However, let us look at some data around this.

The country witnessed significantly lower or negative FII flows in CY2021 and CY2022. In fact, FIIs flows were negative US$ 16.5billion in CY2022. Against this, in the current year we have witnessed US$~20billion of FIIs inflows. This positive FII flow that followed a period of considerably negative flow has played an important role in the upturn of the Sensex and valuations. Without this turn of foreign flows, one would not have witnessed the level of activity presently seen in both the primary and secondary markets.

Further, the foreign flows have started to move more towards the stable Foreign Direct Investment (FDIs) from the earlier predominantly hot money of portfolio investments. This leads to more long-term stability of funds as compared to the portfolio money which can move in and out in the short term as per market returns.

Since FII flows still play an important role in our markets, the question is what to expect from markets in the coming year. As I said, the market at the beginning of the new year is no indicator of where it will end up at the end of 2024. However, standing today, I would believe that the foreign flows will continue. One simple reason is the expected reversal of the interest rates in the USA. Traditionally, our flows are inversely proportionate to the US interest rates. All expectations are that the interest rates will start going down from next year and therefore the inflows will continue to rise. India has been maintaining a premium recipient status of foreign flows – it is one of the main Asian countries to receive FIIs flow. In CY2023, it is the second largest recipient in Asia after Japan. Even amongst emerging markets, it is second only to Brazil. So, overall FIIs flows should be substantially positive.

Of course, we expect to see continued robust flows from the domestic investors which would help reduce volatility in the market, even as foreign flows give the upside. With this we can hope for the good start for 2024 to be positively sustained through the year unless something untoward happens.

The buying spree by foreign institutional investors (FIIs) is likely to have ebbed quite a bit on Dalal Street in recent weeks, as they sold shares worth more than Rs 6,900 crore in five sectors in the first fortnight of August.

Financial services saw the maximum selling by FIIs after witnessing buying for four straight months. FIIs sold shares worth Rs 2,821 crore in this sector in the first half of August, according to data released by NSDL.

Between April and July, they have pumped in a whopping Rs 56,000 crore alone in the financial services sector.

Fast-moving consumer goods (FMCG), one of the sectors contributing to the D-Street rally, also fell prey to selling by FIIs, who sold shares worth Rs 2,022 crore in the first two weeks of this month.

Between March and July, the FMCG sector has seen inflows worth over Rs 12,100 crore from FIIs.

After two months of buying, the trend reversed in the metals sector, as FIIs sold shares worth over Rs 1,000 crore in the last fortnight.

Meanwhile, the pace of the buying by FIIs slowed down significantly in key frontline sectors such as information technology and capital goods.In the IT sector, FIIs net bought shares worth Rs 371 crore in the last fortnight, compared to Rs 1,631 crore in the preceding fortnight.

In the capital goods sector, they net bought shares worth Rs 2,459 crore in the last fortnight, compared to Rs 3,211 crore in the preceding fortnight.

Has the euphoria fizzled out?
On a cumulative basis, FPIs have net invested Rs 10,758 crore so far in August, whereas in July, their net purchases were to the tune of Rs 34,222 crore.

The slowdown in the buying could be attributed to the firming up of bond yields, higher crude oil prices, and resurfacing inflation risks.

In the minutes of the last meeting, officials of the Monetary Policy Committee of the Reserve Bank of India said that the panel will be ready to pre-empt any impact of food price shocks on the broader inflationary pressure.

In July, India’s headline inflation, based on the consumer price index, shot up to a 15-month high of 7.44% due to skyrocketing retail prices of vegetables, particularly tomatoes.

Not only in India, but inflation risks persist globally too, restraining global central banks from hitting the pause button.

The recent rally in equities does not factor in some of these risks, making valuations a bit uncomfortable for some money managers.

“The continued rally on the back of liquidity is now posing challenges…We are, therefore, circumspect about committing fresh flows to mid and smallcap equities,” said Roopali
Prabhu, head of products and solutions, Sanctum Wealth Management.

“While we hold a neutral stance on equities currently, we believe it would serve portfolios well to rebalance now,” Prabhu added.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)

In an intriguing coincidence, India’s GDP beat in April came when the China reopening trade was fizzling out. Till then, in the March quarter, the prevailing narrative was primarily focused on China reopening trade, which led to FIIs withdrawing funds from markets such as India, which had a resilient year in FY23.

However, the consensus China trade did not last long as China’s growth began to slow down. Meanwhile, in stark contrast, India received a significant boost from a better-than-expected GDP growth rate of 6.1% in Q4, surpassing the consensus forecast of 5%. This caught the attention of the FIIs, leading them to reassess allocations and shift flows into India.

While this backdrop of the current bull run in Indian markets has been widely debated, what remains unknown is the ongoing shift in both domestic and FII flows. It is this topic that we aim to explore and unravel in this column.
Let’s turn our attention to the domestic flows, where the evolving story is a lot more gripping and captivating.

In a reflection of the changing landscape, domestic flows no longer play second fiddle to FII flows like they used to a few years back. With the growing financialization in terms of a shift in savings from physical to financial assets structurally, domestic annual flows into equities have the potential to overshadow FII flows, and as a result, can emerge as the dominant force in shaping the Indian markets’ trajectory in the coming years. Here is the data point that will be a revelation to many in this context.

Domestic equity AUM which includes equity MF, DIIs like insurance, banks, and pension funds, currently is 550 billion odd. FIIs overall equity AUM is around 586 billion. The difference, which was close to about 140Bn+ dollars two years back, has now narrowed sharply to around 35 billion dollars.

This is because of the surging domestic flows on growing financialization. Annual domestic flows, which used to be less than 20 billion dollars a few years back, have significantly gone up to over 30-35 billion+ over the last two years. Currently, household savings in equities are less than 10% of their overall financial savings, while in developed markets, it is around 40% or more. This suggests that there is considerable headroom for domestic flows. Given this, it is a question of time before the domestic equity AUM outpaces the FIIs in a convincing manner.

Fortunately or unfortunately, this development may have some unintended consequences for the volatility in the Indian markets. In periods of massive FII pull-outs, one may not see deep corrections as witnessed in previous cycles because of the growing domestic support. One saw the early evidence when the Indian markets went through a shallow correction in the 1st half of 2022 when FIIs pulled out a massive 28 billion+ dollars in just six months of 2022.

On the other hand, when FIIs rush in, Indian markets are likely to overshoot (unrealistic valuations) as we are witnessing now because of the combo effect of domestic and FII flows. This will be an emerging challenge for value investors as cycles would become less vicious and more virtuous. This, of course, may not apply during periods of global accidents and global crises when markets may go through deep cracks.

On the other side of the fence, we have another interesting structural shift unfolding in global flows. It is well known that the concept of China+1 in terms of supply chain diversification gained significant traction after the pandemic exposed the risks of reliance on a single market. But what may be less widely known is the emergence of a similar China+1 play in portfolio allocation among global money managers. This primarily refers to the shift in investment strategies and asset allocation made by global managers to reduce the exposure to China as a measure of geo-political risk mitigation.

Global Investors are increasingly tracking MSCI-ex-China. A Reuters study shows a massive jump in assets of EM mutual funds and ETFs that exclude China as US and European investors are more wary of having exposure to China. Refinitiv data shows China-focused MFs suffered a net outflow of 674 million dollars in the second quarter of this year, while, in contrast, nearly one billion went into EM ex-China mutual funds.

Bloomberg data of equity flows into EMs in the second week this month (July 10 to 14th) shows the US ETFs favored India stocks the most among EM peers and invested 637 million dollars and around 1/3rd of it went to China. Though this is for a short period, this does point to where one is headed. Looking at another data point, China’s weight on the MSCI EM has reduced sharply to 29.55% from 38.7% in 2020, whereas exposure to India has increased from 8.3% in 2020 to 14.63%.

As a result of this diversification from China, Indian markets are witnessing a sharp surge in FII flows. In just three months, over 16 billion dollars have flooded into the Indian markets. For the calendar year, it is over 14Bn dollars and counting (adjusting for the outflows in the Ist quarter).

As a result of the aforementioned structural shifts in both domestic and global flows, along with India’s relatively stronger macroeconomic position, Indian benchmarks, which have been stagnating within a range for over fifteen months, experienced a sudden surge in momentum, leading to a breakout in benchmark indices to new all-time highs.

This surge was bolstered by the robust performance of the Nasdaq and S&P in the global markets. This positive sentiment from these global indices had a timely and amplifying impact on the domestic markets, fueling optimism in all directions.

More importantly, the structural trends in flows explored in this column are something real that is here to stay and gain more traction in the coming years. It is essential for investors to understand this, and accordingly, they should recalibrate their strategies and expectations on the emerging valuation landscape, which could see a profound change in the coming years.

(ArunaGiri N is the Founder CEO & Fund Manager of TrustLine Holdings)

India allowed its companies to list on exchanges registered at a new financial hub in Gujarat, where the nation permits easier foreign transactions.

Public and privately held Indian firms can now list their shares on the International Financial Services Center at Gujarat International Fin-Tec City, Finance Minister Nirmala Sitharaman announced at a briefing Friday. “It will facilitate access to global capital and result in better valuations for Indian companies,” she said.

India has been considering proposals to allow firms to list on foreign exchanges, in order to compete with Chinese companies that flourish on bourses in the US. However, issues including taxation have posed hurdles, and Indian companies can currently only access foreign markets through instruments such as depository receipts.

Businesses operating in GIFT City — a flagship project of Prime Minister Narendra Modi that aims to take on global financial hubs like Dubai and Singapore — are exempt from the many rules and taxes that hamper trading in the rest of India. Trading of India stock futures shifted to GIFT from Singapore earlier this month.