FII Inflows Post Fed Rate Cut To Benefit 'Favourably Valued' Banks

Mahesh Patil: I think for markets this year again, it looks to be a good year. I think clocking here till date and it's been rising again, to some extent, driven by domestically. I think the growth momentum continues to be fairly decent and strong. The GDP numbers have been strong. We've seen that the much-awaited rate cut in the U.S. is also now kind of starting. More importantly, I think the liquidity is right; the money flow into the market continues to be robust from domestic investors, so that is keeping the markets really up. But also now, I think, post the rate cut, and I think with the dollar likely to weaken from here, we could also see emerging market flow of outflows into India, which have been kind of tepid for the last year or so, could also tend to reverse a bit. So I think the direction of the market looks to be fairly in the uptrend; though, I would say that the market, while it would continue to probably go up, we would probably see some more volatility coming in down the line because we have elections in the U.S. Again, the outcomes therefore lead to some volatility on the global front. So that is something that I think one needs to keep in mind. But I think one interesting thing that we're seeing is that while the Nifty and the other headline indices are making new highs, the breadth of the market is now slowly starting to weaken. So what I mean by that is that if you look at the number of stocks, which are down, say, around 20%-30% from their peaks, in this year, I think the percentage of stocks is now kind of increasing. So I think that's a slight change from what the market was doing, say, until the beginning of this calendar year. But otherwise, I think the earnings momentum is definitely slowing down. So I think that should slow down the pace of acceleration in the market, is what I would think.

Mahesh Patil: Yes. I think so, in a way. From the U.S. market standpoint, I think it would be probably a continuation of the existing rule of the Democrats. So, the policy of the earlier regime would continue. So I don’t think that should lead to any large volatility over there. Obviously the stimulus would lead to, in terms of, how do you prime the U.S. economy and ensure that there is a soft landing? I think some of the measures that the Democrats and Kamala Harris have talked about in terms of generating employment should be positive. I would say that in that context, I think the volatility in the U.S. market could be much lower, if that is the outcome of what we are looking at. Even from an Indian perspective, I think I would say that it should be fairly normal. I don't see any reason because Trump would mean there would be more tariff barriers; at least the rhetoric there could have been slightly negative for India.

Mahesh Patil: Not like I mean, we are not going to see the floodgates opening and big money coming in, but if you look at two data points, it suggests that probably you should see the reversal of the outlook, which we have seen in the better part of this calendar year. One is the rate cuts, which means that you will see U.S. dollars starting to weaken and that’s been quite apparent. That would mean more money into emerging markets and India should get its share over there. Also point to note is that India's weightage in the now Emerging Market Index or the global index, is at all times high; it is now overtaken China also, which is to be around close to 22% and relatively, if you look at the global funds, I mean, all the emerging market fund’s fund managers globally are now slightly underweight India. Historically, they have been overweight in India and have been around three to four percent. That has now gone to be marginally underweight. So I don't think there is room for FIIs to really go underweight in India beyond this point because India is a relatively better performing market. So in that scenario now, I think I would say that you should see the flows starting to improve. Obviously India is relatively expensive vis-à-vis the region, and that's what has kept foreigners away. But I think there won’t be much choice because India remains a good long-term growth market, and foreigners would want to participate in that. So I would say that you should see at least the FII flows starting to turn positive, though I would not like to say that you will see a large number coming in, because unless there is a correction and some moderation valuations, you could then see more money coming in in big quantum from the foreigners.

Mahesh Patil: On banks, one is on the technical side; if you look at it, there has been a huge selldown by FIIs in the bank. So when they were selling, the bulk of it was taken by the banking sector, because that's where the larger ownership was, especially somewhere in larger banks, where FIIs had the larger chunk and that's where now I think the after the last selling, I think clearly the positioning of the banks from the foreigners seems to be much lighter, and banks continue to be a large liquid name. So whenever money flow starts to move, I think that's a sector that could probably attract some of that flow. If you look at the private banks in general, they have underperformed in the last year or so, and the valuations there are more reasonable if you compare that with the long-term averages. So clearly there the risk reward looks more favourable, and you could see more money chasing them, and that could possibly be a rotation back into the banks, and you could see a relative outperformance over there going forward. So I think that could be a reason why. I think you could see banks potentially doing well. However, the headwinds from the banks in terms of the deposit growth. I think that still remains. That is still a challenge, and that's the reason why there have been downgrades to the credit growth for the banking sector in this fiscal year to around 12-13% compared to around 14-15% earlier. But I think the overall system liquidity, if you look at the RBI, liquidity is now starting to improve, so that should give some relief in terms of primary deposits. But clearly that remains the biggest challenge at this point in time for the banking system.

Mahesh Patil: I think, in a way, I would say that there are a couple of things on which we are positive. One is the consumer discretionary side, because that is more likely to be influenced by any rate cuts. We see more nondiscretionary buying happening based on leverage and loans, and any increase in cutting interest rates in India, probably six months down the line, could mean that you would see more disposable income at the hands of the consumer and this is a sector that had underperformed last year. It's only starting to pick up now in the last two to six months. So structurally, we think that's a sector that can do well from here. Also, the rural economy is, there are some green shoots there about picking up. Rural wages are slowly improving, the real wages are starting to improve, and the monsoons have been fairly okay. So you should see that picking up. So the second half. I think rural demand could pick up, and that could also drive demand for the rural players. So these are some of the themes that one can look at from a medium-term perspective.