The investors' perspective

Foreign investors (FPIs) in the Indian stock market seem to be heavily betting on the return of a BJP-led political alliance to power. In a surprise move, Goldman Sachs, one of the world's top investment banking, securities, and investment management firm, has changed its India outlook overnight — from "market weight" in September to "overweight", now. The change in the India rating by the investment banking giant came after the Election Commission announced the Lok Sabha poll schedule. What changed in the last six months? In September, Goldman Sachs downgraded India amid rising oil prices and a falling Rupee. Goldman Sachs sees a high possibility of an NDA victory due to low inflation, monetary easing by the Reserve Bank and growing FPI inflows, driving Rupee's exchange valuation to a seven-month high. The fiscal year 2019 will be remembered as the year when FPIs concentrated their buying in blue chips. As a result, the Sensex gained a little over 17 per cent during the year and Nifty gained a little over 14 per cent.

Interestingly, HSBC, also a top global investment management firm, holds a similar view. It forecasts that the current conditions are primed for a bull market supported by strong flows from foreign portfolio investors. "FIIs' coming back into Indian equities gels well with our overall expectation that current market conditions are primed for a bull market ahead. We expect FII flows to remain strong, as they continue to add to their holdings in Indian equities, which has fallen to a five-year low," said HSBC. It thanks "improved chances of ruling coalition coming back to power (in India) and the US Federal Reserve's extended pause on rates." Fund flows in March into Indian equity have touched Rs.27,900 crore, on track to be the highest inflow in a month in two years.

Likewise, CLSA, founded in Hongkong by two journalists in 1986 to become Asia's top institutional brokerage and investment group, thinks that a BJP led government will return to power. "The recent military skirmish with Pakistan could well prove the equivalent for Modi of what the Falklands War was for the late and great Margaret Thatcher in 1982...As for Modi, he is reaping the rewards of a robust response to the killing of more than 40 Indian soldiers in Kashmir on February 14," said CLSA's chief strategist Christopher Wood recently in his weekly note 'Greed and Fear'. Wood gives a "double overweight" on India in CLSA's Asia Pacific ex-Japan relative-return portfolio. Wood sees more room for FPIs to increase their weight towards India as they have not added to their holdings in the past three years.

Until the third week of March, FPIs bought Indian stocks worth Rs 42,800 crore and domestic institutional investors (DIIs) have net sold local stocks worth Rs 11,200 crore on a year-to-date basis. HSBC believes that DII flows are structural and will return as the market rallies. Indian markets are facing a risk that growing uncertainty about the outcome of the upcoming general elections will lead to a slowdown in inflows into domestic equity funds, which have been the main driver of the stock market since the NDA was elected in May 2014, said Wood. The issue, Wood said, is not only whether BJP would win but also that if BJP is re-elected in a minority government, Prime Minister Narendra Modi's style in terms of running the government would be cramped. He said whoever governs India in the next five years will enjoy the dividends of significant structural reform implemented by Modi since 2014.

However, despite the upbeat pro-NDA outlook by such global investment and market research organisations such as Golden Sachs, HSBC and CLSA, a section of FPIs are less certain about BJP-led NDA's clear majority. They are less comfortable with a systematic exit by DIIs from the market, this year. Naturally, their perceptions and market sentiments on the Indian market and the possibility of an NDA comeback seem to differ. In February, these FIIs sold $1.3 billion in debt. They were the net sellers in the bond markets in February, pulling out such a large investment. FPIs sold debt worth of $470.52 million on the last day of February because of various domestic and global concerns. In January, FPIs sold bonds worth $369.85 million. In 2018 they had sold $5.9 billion worth of bonds.

Many small foreign investors are believed to be concerned about Modi's unexpected image problem under the sustained attack from Congress president Rahul Gandhi on the controversial Rafale purchase deal. Also, the recent results in state elections in Rajasthan, Madhya Pradesh, and Chhattisgarh suggest that the pro-BJP wind is showing the signs of abetment. The political wave that transformed BJP into India's natural party of power in 2014, after years of struggling to catch up with Congress and some strong regional parties, appears to be moving in different directions. Many foreign and domestic investors believe that local as well as international developments in April will certainly impact on the outcome of the election. They are prepared to go slow on investment of fresh funds in India's stock and debt markets.

As the election dates near, a good number of India's pollsters are predicting a hung Parliament. This provides a risk factor that few global, as well as local investors, afford to ignore. Domestic market investors are being increasingly concerned about the way the political wind is going to blow in the coming days. As of now, there is no wave in favour of and any political party or alliance in the national election. In fact, that poses a big risk to pre-poll capital market expansion. Notably, Indian stock indices fell nearly one per cent on March 25, logging their biggest one-day decline in over six weeks. This may have something to do with the changing scenario of poll prospects.

(Views are strictly personal)