Investment Management

Riding the FPI-driven Wave: An Opportunity for Domestic Investors

20 Jan 20248 Min Read

Indian equities have rallied strongly in recent years on the back of impressive corporate earnings, strong GDP growth, a growing number of local retail investors and good market liquidity. As a result, India has become the fifth country in the world to reach a $5 trillion market capitalization.

This upward trajectory has led global funds, especially those targeting emerging markets, to raise their exposure to Indian equities. In a remarkable development, BlackRock Japan launched a new ETF tracking the Nifty50 on the Tokyo stock exchange in June 2024, joining a group of passive funds that are shining a spotlight on India’s expanding equity market.

For domestic investors, this global enthusiasm opens up a golden window of opportunity. As international funds flock to India, domestic investors can leverage this trend to amplify their portfolios, ride the wave of growth, and align with the promising trajectory of India’s economic future.

India: The Economic & Demographic Powerhouse

According to India’s Economic Survey 2023-2024, the real GDP (gross domestic product) growth rate will be between 6.5%-7% in FY25, thus solidifying India’s position as the world’s fastest-growing economy among developing and emerging economies.
India’s GDP growth was recorded at 8.2% during 2023-24, which is a strong improvement from 7% in FY22. This growth is underpinned by an expanding labor force and robust local demand.

The disposable income has skyrocketed by 140% since 2014. India is seeing a shift in spending habits from necessities to experiences or lifestyle upgrades. This trend is likely to continue due to factors such as urbanization, a large young population, and changing preferences, making the Indian consumer market the third largest globally by 2027.

But India’s secret weapon is its people. This young and innovative population is perfectly positioned to meet the demands of global manufacturing, making India a future powerhouse. By 2045, India is expected to have the world’s largest and most affordable workforce – a dream combination for any business.

To further drive the momentum, the Union Budget 2024 has placed a strong emphasis on employment & skilling. Central to this agenda, a package of five schemes and nitiatives aimed at providing employment, skilling, and other opportunities to 4.1 crore youth over the next five years.

Hot Market: Foreign Funds Pouring into Indian Equity Markets

Foreign portfolio investor (FPI) inflows into the Indian equity market were modest in the first half of 2024, totaling ₹3,201 crores, compared to over ₹17,000 crores in 2023. A report highlighted that India-dedicated funds listed overseas saw $2.3 billion in inflows for March 2024, with $1.6 billion coming from US-listed funds.

Thanks to strong market performance and positive global sentiment, India’s weight in the Morningstar and MSCI Emerging Market Indexes has increased, while China’s weight has declined. Over the past five years, many global emerging-market funds have boosted their investments in India.

In June 2024, Blackrock Japan launched an ETF on Nifty 50, and this financial year saw four new passive funds tracking Nifty indices debut internationally (three in Japan and one in South Korea). In 2023, seven such funds were launched in these countries. Experts believe these developments indicate growing foreign confidence in the capital markets and the Indian economy. Increased foreign participation can enhance liquidity and reduce transaction costs, though it might also drive up valuations.

Opportunities in Key Sectors

Renewable energy: India is going green

India is working towards achieving renewable energy sources (wind and solar power) with an ambitious goal of having 500 GW of renewable energy capacity by 2030.
With government support and increasing demand for cleaner power sources, this industry is poised to perform well in the coming years.

Manufacturing

India is the new hot spot for manufacturing! India has a ton of talented workers with skills for any job, plus attractive wages (for employers).
The Indian government has given all support with programs like “Make in India” to boost manufacturing

Digital infrastructure

India has a booming digital economy, although it needs a strong fundamental infrastructure to expand further.
This foundation is called digital infrastructure, which includes things like fast internet, data storage centres, and cloud computing.
India is investing heavily in this infrastructure because more and more aspects of daily life, like healthcare and shopping, are moving online.
Despite ranking among the top data consumers per person worldwide, India’s data usage is projected to explode by 300% in the coming four years.

Domestic Investors Can Capitalize on Global Momentum

A great option is emerging for domestic investors as the world is shifting toward the Indian equity market.

In FY24, the total FDI (foreign direct investment) inflows in the country were $990.97 Bn (Apr 2000 to Mar 2024), and total FDI equity inflows stood at $678.86 Bn (Apr 2000 to Mar 2024). The resultant entities generate wealth for all. For instance, while 47.43% and 62.76% of HUL and Nestle profits are repatriated, the balance is still a larger quantum for domestic investors.

As the market expands, it also necessitates the introduction of new product offerings. ESG (Environmental, Social, and Governance) investing, REITs (Real Estate Investment Trusts), InVITs (Infrastructure Investment Trusts), and AIFs (Alternative Investment Funds) are prime examples of this evolution, with the potential for widespread benefits to the Indian populace.

Continued investments from FPIs will mean sophisticated risk management and compliance. International oversight will necessitate better corporate governance and stronger regulation implementation, helping all stakeholders get more value.

Bottomline
The recent rally in the Indian stock market, powered by robust corporate earnings, GDP growth, and retail investor participation, highlights the market’s rising potential. Through this wave of expansion, domestic investors can align their investments with a vibrant Indian economy.

Despite some risks, the robust economic outlook and increased foreign participation make it an exciting time to invest in India’s growth story. By tapping into the global momentum, domestic investors can align their portfolios with India’s growth trajectory, leveraging the benefits of increased foreign participation and the country’s robust economic prospects. As India continues to grow, this mutual growth potential allows both domestic and foreign investments to thrive together.

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