Macquarie Expects India To Correct 5–7% More As China Lures FIIs Away

Indian markets may witness another 5–7% correction in the near term amid the continuing outflow by foreign institutional investors as they shift focus to China, according to Sandeep Bhatia, managing director and head of equities in India, Macquarie Capital.

While multiple factors like geopolitical tension and higher valuation of Indian stocks remain a concern for FIIs, China is poised to gain from the speculations over the economic stimulus. However, Bhatia predicts that though the current scenario puts China at a big advantage, it won’t "change the India story".

He told NDTV Profit that a 20% correction is likely to be good for the Indian markets. However, he added that in the near term, a 5–7% correction is more likely due to the attention that FIIs are paying to China.

“In the near term, given the fact that India flows will be good, another 5–7% correction is something that is warranted by the fact that attention is going to China. I think India needs to have a period where the market comes down to more sustainable levels. Hopefully, if that happens quickly, that is a good outcome,” Bhatia said.

Amid escalating geopolitical tensions in the Middle East, a rally in Chinese stocks, and other macroeconomic factors, FIIs have so far this month sold the highest amount of shares by value in the past four-and-a-half years.

So far this month, as of Oct. 11, the total outflow after FIIs turned net sellers has been to the tune of ₹58,711 crore, according to the NSDL data.

“China will be the flavour of the month or the quarter. Through October and December, there’s definitely a likelihood that China will continue to take more steps to make both its markets and economy look better. Structurally, I don’t think that changes the India story or puts China at a big advantage. Markets are definitely aware of this fact, but in the near term, China is the flavour,” Bhatia added.

He added that presently, valuations for India are expensive and he would welcome corrections as they are good for the long-term health of the Indian markets.

“Domestic inflows will definitely be strong. The only thing we need to worry about is whether we continue the 7% plus GDP growth that we are on right now. Valuations for India are expensive and demanding. To that extent, I would actually welcome a bit of a correction in this market. So, this kind of pivot to China, which FIIs are doing at least, is welcome for the longer-term health of the Indian market,” Bhatia said.

While he expects FIIs to continue selling, Bhatia said, “It is impossible to exactly predict the nature of market correction."

But he foresees a quick correction in the benchmark indices. "In my view, a sharp correction and flows from domestic investors remaining strong is the way forward,” he said.

However, Bhatia said, “It is impossible to exactly predict the nature of market correction. I don’t think it can be too slow and grinding because underlying EPS momentum is still there in the corporate sector. It can still be slow and grinding, if you think that the EPS will not come through."

He added that in case of a broad correction in markets, he would invest in stocks of private sector banks. He finds the valuations of private sector banks decent and expects the sector to see better days, if the US continues to cut rates into the next year.

Bhatia also suggested that if the US economy grows and spending on IT is sustained, his picks could be IT stocks amid a correction in the broader market.

“The other thing is, if US growth is sustained and IT spending is sustained, probably the IT sector is one way to look at it. Some of the small and mid-cap sectors are where definitely there would be much higher pressure,” he said.