Were expectations of FII flows coming back with a bang in 2024 misplaced? Shibani Sircar Kurian answers

Kurian also says: “We do believe that India still remains fairly favourable in the emerging market context. Globally, if interest rates come down, that’s also favourable for the emerging market pack as well. And therefore, from that perspective, India continues to remain fairly impressive in the relative EM pack.”

In the last week of December, everybody seemed to be of the opinion that let January come and then FII flows will come back. Yes, the dollar index has fallen. Yes, the acceleration in flows have been seen in the last few weeks, but it does not happen like clockwork. If they have to come, they will come with their own ease and not exactly 1st of Jan, 2nd of Jan. Every day there has to be a buy figure from the FII side. So expectations of this sort perhaps were misplaced?
Shibani Sircar Kurian: As you are rightly pointing out, it is not that it works on a particular date or a time in terms of a clockwork sort of a reaction. However, when you look at the flows that we have been getting, especially where India is standing out in a relative context to the emerging market pack, given the fact that our macro as well as our earnings growth trajectory, both at an absolute as well as relative basis has been extremely strong.

So if you look at 2023, for me, the standout feature was that unlike many years in the past, where we saw earnings downgrades, earnings actually got upgraded. Therefore, when you look at India’s valuations in context to return ratios, as well as earnings growth in the entire emerging market pack, India clearly stands out. However, for an FII or for anyone investing into India, they look at India in the global context and therefore valuations do play a role.

In that context, when you look at India’s valuations on a relative basis, India continues to remain expensive. However, our belief is that given India’s performance on the earning side, as well as macro stability, as well as growth valuations will typically always be at a premium. And therefore, we should look at India more on a PEG basis rather than just a PE basis.

Therefore, we do believe that India still remains fairly favourable in the emerging market context. Globally, if interest rates come down, that’s also favourable for the emerging market pack as well. And therefore, from that perspective, India continues to remain fairly impressive in the relative EM pack.

Yes, the market move has been in tandem with the kind of earnings upgrade that we have seen as well. But the question is, is the pace of upgrades going to slow down materially and perhaps the cycle would reverse in the sense that there might be some downgrades that might start? I ask that question because the early commentary that we’ve got from the FMCG players or the IT players or even autos for that matter is not showing that amount of strength right now. Do you think at the end of the Q3, there might be more downgrades than upgrades?
Shibani Sircar Kurian: We are not expecting to see any major earnings downgrades. But if you look at the first half of the year, in terms of earnings, the first half of the year has been extremely strong. And from that pace, you might see some amount of slowdown on a quarterly basis. However, we do not expect to see major earnings downgrades. And if you look into the next year as such, which is FY25, earnings expectations continue to remain fairly healthy in the mid to high teens, which is again supporting Indian markets and valuations. What we need to watch out for is one, so far earnings have been predominantly led by domestic businesses, which are still holding up well. The second sector, which has also been a key contributor to earnings has been the banking sector. Here, incrementally, we are seeing some degree of margin pressure and therefore, you need to moderate earnings from that perspective. But banking still will continue to remain one of the large contributors to the overall profit pool, if you look at the markets.

The third aspect that we need to watch out for is unlike the previous year, which is FY23, FY24 has seen a more broad-based earnings trajectory. So, more sectors are contributing to the overall earnings pie. So, at this point in time, given that the outlook on earnings remains fairly intact, we do not expect to see major earnings downgrades for 24. Of course, we will have to wait and watch and see commentary going into FY25, especially where consumption, discretionary consumption goes and IT. These could be two large spaces where one can see some improvement going into FY25 and that could help support earnings as well.