Historical trends predict significant FII influx into India’s markets for 2024, signaling a bullish outlook for large-cap stocks.
Signals from the US Federal Reserve hinting at potential interest rate cuts in late 2024 have sparked enthusiasm among global investors. This optimism has propelled both the world’s debt and equity markets into a new bullish phase. In India, this upbeat sentiment is reinforced by the increasing likelihood of the current government’s tenure extension, coupled with the growing confidence in US rate reductions.
Indian investors have consistently fueled India’s market growth based on the country’s robust economic fundamentals. Conversely, foreign investors had been cautious, awaiting clarity on India’s political landscape and the US interest rate scenario. With these uncertainties now seemingly resolved positively, foreign investors have shifted gears to an offensive strategy, leading to a surge in buying activity. Historical patterns foreshadow a substantial influx of Foreign Institutional Investment (FII) into India’s market in 2024, a reassertion of their pivotal role.
Nevertheless, Indian retail investors might feel overlooked as FIIs aggressively capitalize on market opportunities. Previously, retail investments, either direct or through Portfolio Management Services (PMS) and mutual funds, were predominantly in mid-caps, small-caps, and micro-caps, largely bypassing large-cap stocks. These larger entities were often engaged through futures and options markets. Some even divested from large-caps to seek higher returns in smaller caps. While large-cap stocks posted modest gains due to FIIs’ sporadic buying and selling, smaller companies experienced more significant returns. However, the trend of outperforming small and micro-caps appears to be reversing as current market dynamics evolve.
Amid an uptick in FII (Foreign Institutional Investors) activity, large-cap stocks are experiencing a surge, contrasting with the stagnation or decline observed in mid, small, and micro-cap categories. This suggests a shift away from speculative investment in the latter toward futures and options (F&O). Despite past positive market events, most stocks within these smaller categories are trading below their pre-event valuations. However, experts caution against increasing holdings as retail investors already have substantial exposure.
The question arises: are FIIs the final investors to act out of FOMO (fear of missing out) as the bull market reaches its peak, or is this an indication of an enduring bull market with more growth to come?
The remarkable situation reveals that even at peak interest rates, global stock markets, including India’s, are performing robustly without an economic slowdown in sight. Historically, lower interest rates kick-started economies from lower bases. Today’s high base poses the question: could falling rates have a different outcome? With no significant slowdown and a potential increase in risk appetite if interest rates drop, could this trigger a rise in commodities prices and inflation, subsequently postponing rate cuts? These economic puzzles remain unsolved.
Despite this uncertainty, the significant capital wielded by FIIs dictates that their trends must be acknowledged. The influence of Indian investors on the local markets may be diminishing as FIIs, driven by global factors rather than Indian market fundamentals, continue to invest and divest in large sums, often using sophisticated theories to rationalize market transactions indifferent to current stock prices.
The market’s spotlight on large-cap stocks’ continued growth raises the question: Will mid-, small-, and micro-cap stocks follow suit? This trend hinges on the persistence of the favorable ‘goldilocks’ economic conditions. Investors are advised to look beyond the market capitalization labels and assess stocks on individual merits, focusing on their fundamentals and fair valuation.
Investors are encouraged to adopt a ‘buy-and-hold’ strategy for stocks that demonstrate promising earnings potential and are reasonably priced, regardless of their market cap. Over time, the market will inevitably adjust, acknowledging a company’s intrinsic value or lack thereof, benefitting or penalizing investors accordingly.
Fixating on short-term stock price movements is less productive than maintaining a long-term perspective. A focus on extended horizons will navigate through the volatility, incorporating fluctuating trends across various market cap ranges, sectors, and themes.
