Market likely to experience sharp FII inflows by end of ‘23 and beginning of ‘24: GV Giri

GV Giri, President, IIFL Securities, says that towards the end of the calendar year, we might see inflation getting tamed and come successfully under control and if there is sufficient evidence that it is going to stay low because our growth is weakening, we might see rate cuts also. And that is when money could come back. So for the next 6-8 months, there may not be a very strong inflow. It could even be an outflow period for FIIs. After that, in the last part of the year or the beginning of next year, we could see sharp inflows.

Last 6 to 8 quarters also have been slightly challenging in terms of FII flows towards India in particular. Do you see all of that getting reversed now with the dollar index coming back? Also, what does it mean for Indian markets, which up till now were a lot dependent on FIIs but now the DII front is becoming stronger?
Firstly, on the dollar weakening, the US yield curve dropped quite significantly in the last six months. And that itself in turn is because there is an expectation that the US economy will react to the lag to all the interest rate increases of last year and this year and therefore, the economy will slow down and therefore there will be rate cuts. That is what the market expects. So, the dollar weakens in anticipation of the rate cuts.

As far as our market is concerned, it is still dominated by FIIs. We just did one calculation which says that as of seven years back, the cumulative investments done by FIIs from all time back till then was almost 12 times the cumulative investments done by DIIs; but that ratio has fallen now to only one is to 1:1.8. So, FIIs have put in about $180 billion and DIIs have put in $100 billion cumulatively. On paper, it would suggest a much more balanced market.

But the fact remains that $52 billion came in during June 2003 to 2007 and then April 09 also around that much came in. Both times, the Nifty jumped by 50% or a little bit more. But the same thing happened on May ‘20 also. This time only $37 billion came in from FIIs and the Nifty jumped by 56.7%. So although the FII investments cumulatively are a smaller multiple of the DII investments, their impact on the Nifty seems to be still almost undiminished.

When FIIs sell, it is in a concentrated burst and when they buy, it is in a concentrated burst. Having said that and looking at our valuations, the recent rally and my expectation is there will be a bit of a slowdown, earnings recession globally and in India, money will look for haven assets, move a little bit away from emerging markets and move out of India.

There will be a selling period, maybe not as concentrated as the selling period as mentioned in these notes. But towards the end of the calendar year, we might see inflation getting tamed and come successfully under control and if there is sufficient evidence that it is going to stay low because our growth is weakening, then we might see rate cuts also. And that is when money could come back. So for the next 6-8 months, there may not be a very strong inflow. It could even be an outflow period for FIIs. After that, in the last part of the year or the beginning of next year, we could see sharp inflows.

You made a very interesting point that taming of inflation actually will come on the cost of this engineered slowdown and this will translate to earnings growth getting decelerated in India, too. What is your own estimate right now for earnings growth and how is it on the lower side versus the street?
We are at ?924 for FY24. This number was a little bit higher earlier. The downgrades are continuing. Most of the downgrades are, as of now, packed in discretionary consumption sectors but if you look at the indices, they are all packed heavy with commodity companies. If commodities stay soft, there will be some further earnings downgrades. You cannot really predict in very clear terms in commodities but ex of commodities, we can say that discretionary consumption dominates and there will be more downgrades.

We should be a little bit below the Street significantly. I expect our earnings and the Street earnings to be moving downwards over time. As far as commodities are concerned, they do not get that much multiples and you could see the overall index earnings staying flat, or maybe even go up a little bit if commodities see a sharp upturn,

I do not see what will lead up to that upturn. One factor could be that China's reopening picks up momentum. It is a big economy so it will probably pick up momentum during the year. And in the second half of the year, we could see more reopening, more construction activity, continuation of growth, That will keep the floor under commodity prices and that part of the Nifty EPS might stay firm but the balance will see some weakness.