Investors' Interest In India Remains High, But Valuations A Concern: Citi Research
Reasons for favorable bias on India are secular growth outlook particularly relative to peers, supportive macro, expectation of policy continuity post-election outcome, financialization of savings.
Investors interest in India remains very high given the increased weightage of the country in MSCI indices, even as the high valuations continue to weigh on sentiments, according to Citi Research.
Reasons for favorable bias on India are secular growth outlook particularly relative to peers, supportive macro, expectation of policy continuity in an election year, financialization of savings, it said.
International funds are revisiting India's positioning given its increased weight. In the last four years, India’s weightage in the MSCI All Country World Ex-U.S. index has gone up from 2.4% to 4.9%, while in the All Country World Ex-U.S. Small Cap Index, it has gone up from 3% to 8.1%, the note said. India's weight in the MSCI EM Index is now 18%, up from 13% in January 2023.
However, a lot of investors do struggle with high valuations, resulting in some money staying on the sidelines, Citi Research said.
Lot Of Focus On SMIDs
Last year, small- and mid-cap companies showed significant outperformance, partly due to increased investment in this category. This success has led investors to delve deeper and explore new ideas, Citi Research said.
"A disproportionate amount of time (vs the past) was spent discussing SMID ideas; however, there was scepticism in some clients on how long SMID outperformance could continue and what could drive underperformance," the research firm said.
The BSE small-cap index has risen over 65% in the last 12 months, and the BSE mid-cap index has surged over 62%, according to Bloomberg data.
View On Information Technology Sector
For international funds, it is all about the slope of recovery next year for the Indian IT services sector, Citi said. Some improvement in FY25E is widely expected but the pace of recovery in discretionary spending is the key talking point, the note said.
"Lot of clients struggling with valuations in the context of slow revenue growth", it said.
There is a preference of Cognizant on turnaround potential and lower valuations. There is a lot of debate on Infosys vs TCS and how long can HCL Tech continue to outperform, Citi said.
Other Things To Watch
The other key factors that international funds keeping track are:
Challenges in the banking sector challenges as to whether it is cyclical or more medium term?
Public capex growth slowing?
PSUs – can the sharp rerating continue or done for now?
Mid-cap outperformance – what can change the direction?
Domestic flow momentum – how long can it sustain?
Election outcome – what odds of negative surprise given that market view seems to be very consensus
