Indian stock market: Foreign investors looking for meaningful correction to invest – Kotak Equities

Foreign investors interest in India has in India is on the rise; however, they are vigilantly monitoring valuations to identify an opportune entry point. According to Pratik Gupta, CEO & Co-Head, Kotak Institutional Equities, foreign investors are looking to buy more Indian stocks, however, looking for meaning correction in the Indian market.

“The strong foreign investor interest is not because they’re looking to buy Indian stocks right away, but many of them had come to learn more about India and specific companies, so that they can be ready to buy as & when there’s any meaningful market correction. Those who know India well walked away getting reaffirmation of the positive outlook for India and for many companies, and those who were visiting India for the first time or after many years were pleasantly surprised at the energy/enthusiasm of Indian companies in general and of the local investors as well,” Gupta said in a note.

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Gupta observes that numerous Foreign Institutional Investors (FIIs) are presently monitoring valuations diligently, conducting thorough research, and strategically investing during significant market corrections. 

He highlights that FIIs currently harbor a notably optimistic long-term perspective on India's market trajectory, expressing confidence in its resilience. This marks a departure from previous perceptions among FIIs, which often categorized India as a cyclical market, with performance fluctuating between strong and weak years. Now, there's a distinct shift, indicating a broader recognition of India's sustained growth potential and stability, fostering increased investor trust and commitment.

Strong inflows from Japan

One of the major reasons behind renewed interest of foreign investors in India is its inclusion in the MSCI Index. However, the rising interest is not necessarily coming at the expense of China, Gupta added.

He further highlighted that a few were getting strong inflows from Japan where the sharp currency depreciation has helped exaggerate returns from India. However, many global investors expressed hopes that a likely Fed rate cycle later this year would trigger more inflows into EM funds or even India-dedicated funds, and most were expecting China to remain range-bound this year.

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“At the start of every year in 2022, 2023 and 2024, CIOs were very bullish on EMs, but China’s decline impacted overall EM outperformance. Global investor highlighted that EM-ex China did better than most global indices in 2023, and if China stays just flat this year, it could result in a much better overall EM performance this year, which could result in more EM inflows next year,” he added.

Gupta also revealed that a big big change this time from the foreign investors was noted which is that they’re not looking just at the large caps or just at the banks or IT or consumer sectors which used to be the broad trend for the last few years. This time, there has been a notable surge in interest observed from foreign investors, extending even to mid-cap stocks.

Stock Market Outlook for 2024

The India market began the new year with a turbulent note, marked by highs and lows that kept investors on the edge of their seats. Gupta believes that the market this year is likely to remain range-bound this year at 20.5x March 2025 P/E.

“We expect the market to remain largely range-bound this year. We believe the market is expensive trading at 20.5x March 2025 P/E, which is significantly higher than historical averages and higher than most other emerging markets. This is especially high considering a likely slower earnings CAGR of 11% in FY25 and FY26 (vs 19% in FY24). Hence, we don’t expect meaningful upside to the market in the short term,” Gupta said.

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Conversely, the downside is protected by India’s strong medium term growth prospects which should keep valuations elevated, and a likely lower interest rate environment in 2HFY2025.

“We continue to like the large banks, life insurance companies, residential real estate, and the hospital sectors. We remain cautious on many of the consumer staples and discretionary stocks in general,” he added.