Home / Markets / Stock Markets /  Investor confidence will return gradually: Kaushal Shah

MUMBAI : With July turning out to be the best month for the domestic equity markets in 2022, expectations are buoyant around the course of market direction in the near to medium term. In an interview, Kaushal Shah, executive director and head-equity capital markets, Kotak Investment Banking, laid down the key factors shaping investor sentiment. Edited experts:

Foreign institutional investors (FIIs) have been consistent sellers of Indian equities for a long time now. When do you see the tide reversing?

FIIs have sold a massive $33 billion since October 2021, including $6.3 billion in June. However, the rate of FII outflows has moderated over the last four weeks and, in fact, the week of 18 July saw FIIs turning net buyers for $1.2 billion. FIIs need stability and certainty to take a directional view. Over the last nine months, markets have seen a consistent flow of negative news, which has led to significant portfolio loss for investors and high levels of volatility.

While recession is a concern, it seems that we are nearing the end of the shocks and the markets are now primarily focusing on fundamental factors rather than technical factors. With this, we may see investor confidence gradually come back. Near-term activity will likely be driven by follow-on trades. Given the headwinds, IPOs are currently selective and limited to scaled and differentiated stories. Additionally, while valuing companies, investors are building in a pricing cushion for managing uncertainties and volatility. Markets will provide select windows for launch like in late April and early May 2022, where five large IPOs got done.

Is India better placed than emerging market (EM) peers?

India has outperformed global indices and the past one month saw Indian Nifty gaining 6.6% versus MSCI EM giving negative returns of 1.5%. This is possible given the strength of domestic flows. DIIs (domestic institutional investors) have infused a record $40 billion since October 2021 on the back of consistent robust SIP (systematic investment plan) flows—June quarter flows averaged $1.5 billion, higher than FY22 average of $1.3 billion.

Additionally, retail and HNI (high net-worth) investors have contributed meaningfully to domestic flows.

India has shown resilience with a stable political scenario and strong economic and macro factors; India is expected to register one of the highest GDP (gross domestic product) growth for 2022 globally.

There is some risk aversion among foreign investors with regards to China. Do you expect India to benefit from it?

China is a big market for investors and will always be in consideration. China will find blips in flows due to policy risk or other concerns like the current real estate stress; however, investors will evaluate on a risk-adjusted basis—in case they believe that the market correction considers the policy risk, they will be open to investing. However, the FII flows into India during that period was irrespective of the China correction and driven more by domestic indicators and global factors.

The silver lining behind a probable recession in the West has been the softening of input costs across sectors. Do you feel domestic demand will sustain to benefit from this?

There are initial indicators pointing towards recession in the West, but we will have to watch out whether it is for real. However, Indian corporates will definitely benefit from cooling commodity prices and, hence, lower input cost. While there is a potential impact on demand due to recessionary pressures, it could be sector-specific and may be offset to some extent by strong domestic demand and consumption story.

The 75-basis point hike by the US Fed is along expected lines. Can there be surprises from the Reserve Bank of India in the next policy meet?

Regulators the world over are focusing on managing inflation. Markets are expecting RBI to increase rates by 35-50 basis points in the upcoming policy meet, which is not surprising. India is in a much better situation regarding inflation. While India’s CPI (Consumer Price Index) is range-bound for last two years (current levels of 7.0% vs 6.2% as of 30 June 2020), most developed economies have seen record-high inflation levels and emerging economies are seeing multiple time increase in CPI in the same period.

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