Banks Could Benefit From US Rate Cut-Triggered FII Inflows: JPMorgan's Sanjay Mookim

Indian banks could benefit as foreign investors pour money into the country with the US Federal Reserve rate cuts, said Sanjay Mookim, head of equity research at JPMorgan.

A potential influx of foreign institutional investment in response to the US rate cuts, could be a pivotal moment for India’s investment landscape. Historically, rate cuts in the US tend to drive capital out of American markets and into emerging economies like India, he noted.

The banking sector could see significant benefits from this trend. However, many FII investors are already heavily weighted in Indian banks, raising questions about how new inflows might affect their allocations, Mookim said.

While many central banks, including those in Japan and Brazil, have raised rates, the trend towards rate cuts could benefit equities if accompanied by sustained economic growth, he said. "Equities thrive in scenarios of low inflation and reasonable growth. If rate cuts signal a healthy economic environment, asset prices across the board will likely support that."

Discussing India's economic outlook, Mookim acknowledged recent GDP downgrades but remained optimistic. India has experienced GDP upgrades in recent quarters, and while we’ve seen a minor downgrade this time, the long-term growth trajectory remains positive, he emphasised.

In terms of market valuations, the Nifty 50's weighted average price-to-earnings ratio aligns closely with that of the S&P 500, which indicates that India's large-cap stocks are not overly priced compared to global standards, Mookim said. However, he cautioned investors to maintain realistic return expectations if entering the market at high valuations.

"While sectors may appear overvalued, the index itself is fairly priced. If you invest now, temper your return expectations, as buying at elevated multiples can lead to moderate future returns," he advised.

Mookim also discussed potential investment pockets within India, particularly in sectors like real estate, which will continue to thrive due to under-penetration in residential markets and shifting investor sentiment away from fixed income towards equities and real estate.

The broader context of global economic conditions is critical. With US growth slowing, other emerging markets, particularly China, facing challenges and north Asian countries seeing a tech slowdown, the growth differential may not favour emerging markets as strongly as anticipated, he explained. This situation complicates the investment landscape, as funds may be cautious in reallocating, based on uncertainties in the global economy, he said.

Despite these complexities, evidence suggests a growing interest in India, particularly through dedicated emerging market funds for the country, Mookim said.