After continuous selling for about six months, FIIs have once again started buying in the Indian stock market. So far in July, foreign investors have bought Indian shares worth about $1.8 billion. The question is why did his stance suddenly change? Jefferies’ Global Head of Equity Strategy Christopher Wood believes that the reason for this is not any major change in India’s economy, but the slowdown in the pace of global AI trade. This means that a part of the money which was going towards AI stocks has now started returning to markets like India.
The return of foreign investors (FIIs) to the Indian stock market has attracted the attention of investors. Jefferies’ Global Head of Equity Strategy Christopher Wood says that the biggest reason for the record selling from India in the last months was not the weakness of the Indian market. The real reason was the global AI trade, which attracted foreign investors towards AI and technology hardware stocks of countries like South Korea and Taiwan.
According to Wood, in the first half of the year, emerging market funds raised cash by selling Indian shares and invested it in AI-themed markets. This was the reason why a record sale of about 29 billion dollars was seen from India. But now the picture seems to be changing. Till July 15, foreign investors have bought Indian shares worth about $1.8 billion, which is considered to be the first monthly purchase since February.
AI trade pace slowed down
Christopher Wood believes that the buying in July is an indication that global investors are now withdrawing some money from AI stocks and investing in other markets. He says that India has been the exact opposite market of AI trade. When there was a boom in AI stocks, money went out of India and now when the pace of AI theme has slowed down, money has started returning to India. However, he believes that a big and sustained return of FIIs will happen only when either AI trade reaches its peak or there is a big decline in the valuations of the Indian market.
Domestic investors gave strong support
Despite foreign selling, the Indian market remained strong. The biggest reason for this was domestic mutual funds and SIP investors. More than Rs 31,800 crore was invested through SIP in June, which was about 87% of the total investment in equity mutual funds. Christopher Wood says that continuous domestic flow reduced the impact of foreign selling to a great extent and kept the valuation of the Indian market strong.
Opportunity visible in large cap shares
Jefferies believes that large cap stocks can perform better in the coming times. Midcap stocks have given excellent returns in the last two years. Since the beginning of 2023, Nifty Midcap 100 has gained almost 99%, while Nifty 50 has gained only 33%. Now large caps look relatively cheap in terms of valuations. Jefferies estimates that the earnings growth of large cap companies may be 14-15% in the next two financial years. Whereas the growth of midcap companies is expected to be around 20%. In such a situation, with the valuation gap reducing, there may be an opportunity to invest in large caps.
Some big risks still remain
However, despite the return of foreign investors, some risks remain. The increasing tension around the Strait of Hormuz in the Middle East and rising crude oil prices are a matter of concern for the Indian market. India is heavily dependent on imports for its energy needs. Apart from this, the weakness of rupee also affects the returns of foreign investors. Along with this, equity issues and promoter exit are also increasing the supply in the market. In such a situation, the strategy of FIIs in the coming months will largely depend on the movement of global AI trade and crude oil. If the pace of AI theme slows down further, then the return of foreign investors in the Indian market may become stronger.
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