Expert view: As foreign portfolio investors (FPIs) have turned net buyers of Indian equities since July this year, Vikas Gupta, CEO and Strategist at OmniScience Capital, believes non-AI diversification could drive more FPI inflows to India. In an interview with Mint, Gupta said a spike in inflation will prompt the US Federal Reserve to hike rates, but the most likely course for the US Fed is to hold rates steady, given the balance between job growth and inflation. Edited excerpts:
India is among the worst-performing major markets this year. When do you expect a shift in sentiment?
Based on the consistent July and August inflows, it looks like the beginning of a sentiment turnaround for FPIs. Most likely, this could be an initial exploration of allocating to the non-AI assets to balance or hedge their portfolios.
In the emerging market index, Taiwan and South Korea have higher allocations compared to their long-term weights. Even if that continues, India is likely to start getting more allocations from the non-AI diversification allocations.
What is the outlook for the US markets amid increased concerns over inflation and potential interest rate hikes?
If inflation spikes in the US, the interest rates are bound to increase. However, it is not a given. CPI/PCE seem to be stabilising, but remains above 3%, significantly above the Fed’s 2% mandate.
The jobs data also show a decline in payrolls, which biases the market towards a rate cut. Given the balancing between job growth and inflation, the most likely course for the Fed is to hold the rates steady.
What does a spike in bond yields in the US and Japan indicate? What does it mean for emerging markets like India?
The Japanese central bank has to raise interest rates to safeguard and bolster the currency and avoid further import-driven inflation from oil and food imports.
The US is also trying to cooperate with Japan in its endeavour. However, the global energy, commodities, and food situation appears inflationary in the near term due to the various wars disrupting global trade.
Further, the huge AI capex also seems to be boosting the cost of capital. Finally, the pace of US Government debt at $1 trillion per quarter, which is pushing it toward $40 trillion, is also alarming bond markets.
Highly developed markets’ bond yields are a negative force on FPI flows, but allocators to emerging markets are likely to shift more of their emerging-markets equity towards India.
India is severely under-allocated, given that it is the fastest-growing major economy across emerging markets, Asia, and the World.
What should be our equity investment strategy at this juncture? Is it time to book profits on every rise?
As long-term (3-5+ years) investors, we think such times are when one should allocate more based on their long-term asset allocation targets.
One can, in fact, consider going slightly higher towards equities relative to long-term allocations during bear markets, when valuations are low, and slightly lower when valuations seem to be going extraordinarily high relative to the expected future growth, inflation, and interest rate trajectory.
If one has to invest for the long term, which sectors should one look at?
We are focused and overweight on Financial Services, especially PSU and private banks (large and midcaps).
The balance sheets are strong and diversified; NPAs are at a two-decade low; credit growth is in the mid-teens and is likely to remain so for the next 3-5 years, as demand comes from all 3 segments: government, corporates, and households.
Our next favourite is power, which is our way of playing multiple growth vectors, including AI data centres, EVs, railways and logistics, and overall economic growth. Housing finance is another sector which is a strong growth vector but mis-priced.
Can elevated oil prices delay earnings recovery in India?
Elevated oil prices are definitely a huge concern for the Indian economy. It puts pressure on the forex and imports inflation. While the economy is resilient and likely to adjust to higher oil prices, specific companies are definitely impacted, and their earnings will take a hit.
This risk factor should be closely monitored. On the flip side, if and when the Middle East war stops and oil prices come down, that would be a huge boost for the currency, earnings growth, and the stock market overall. But the timing of that looks uncertain at the moment.
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Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
