Foreign inflows of $45-50 bn over next 2 years to drive the next market rally, says Jimeet Modi

• Stage set for the return of foreign institutions at rates showing signs of flattening. India’s weightage in foreign portfolios is likely to head higher.
  
• India expected to start cutting rates as the country heads towards General Elections in May 2024.
  
• Valuations may not be cheap, but given macro-economic stability with reference to peers, India is likely to attract capital flows despite global slowdown.
  

The month of May 2023 has been unusual because money fund managers have defied the ‘sell in May and go’ trend and Jimeet Modi, CEO of Samco Group, believes this rally has more legs. The six-month period starting November is typically considered to be the best for stock traders, which is why May is when there is little action on Dalal Street. However, this year has been different for Indian stocks as foreign institutions have come back in droves.

According to Modi, the stage is set for a new rally and it will be led by foreign institutional investors. He says: “Historically we have seen that whenever US interest rates peak or flatten, money returns to EMs. This time India is on top of the list as far as flows are concerned. We will see an unprecedented amount of money coming into India over the next couple of years. Our sense is that we may see $45-50 bn coming into India in this period. The weight of India in overall asset allocation is going to go up.”

Modi is not alone in his assessment of India. Chris Wood of Jefferies says he is tactically more bullish on India than a year ago, which is when the Reserve Bank of India had just started hiking rates. The broader markets believe that rates have peaked and are either headed for a pause till the end of this year.

In an interview with Business Insider, Jimeet Modi said that the rally will continue because rates are expected to start coming down towards the end of this year or early next year. He says: “The peak of the interest cycle is behind us so either rates will be flat from here on or they will start declining. We expect both global as well as India’s rates to start declining from November or December, which will support equity markets.”

There are several other factors that are likely to support a sustained rally in Indian shares. The market saw retail participation in Indian equities go through the roof during the two years of the pandemic. This also triggered a lot of companies tapping the primary markets with pricey initial public offerings. In the last 18 months the rally has cooled off and retail sentiment is now relatively weak. Modi says that even though the froth has gone and markets are hitting new highs, retail participation is nowhere near what it was in the go-go days of the pandemic. The IPO market is also showing no sign of a revival anytime soon.

According to Modi, “A combination of markets moving to new highs and poor sentiments sets up a base for a new rally. Barring any negative surprises globally or any large accidents in the financial system, we should make a series of new highs in the second half of this year and next year as well, as we build up towards the next general elections.”

Markets tend to give positive returns one year before general elections data shows. As India heads towards the May 2024 General Elections, markets are looking at the current government to make a comeback as it has provided policy stability over the last decade. Even though the Federal Reserve and the European Central Bank are expected to contract their balance sheets, experts believe that India stands out with reference to peers. However, liquidity has not yet started drying up. According to Ambit, “As liquidity dries up short rates start going up and opportunity cost of investing in equities goes up.This can impact foreign institutional flows, though India stands out with reference to peers.”

Despite the odds, benchmarks could very well exit FY24 with 12-15% gains. Says Modi: “We typically don’t give a target for a fiscal year period. But I think generally we are of the view that markets are set for a 12-15% rally in the benchmarks.”