WHEN FII'S WILL BE BACK IN INDIA ? Midcap Opportunity

Nifty would have been 20000 or 22000 by now based on the strong economic position of the Indian economy. But we came down crashing from the highs of 18500. Indian economy does not have any other issue to worry about apart from the inflation created by crude.  FII’s have been selling but do you know when the FII will come back. The insight will throw light on many aspects of Indian markets, Midcaps and on FII’s comeback.

  You are focusing aggressively on getting rationales which will get Nifty to below 13000 levels.   The search for a larger bear in the market have now become a normal scenario.  We know that we will find more aggressive interest rate actions from U.S Fed which does not understand that rising rates own help.  We will witness sharp depreciation in the Indian rupee and CAD getting depleted faster as import becomes expensive.   Corporate earnings will be a mixed bag since export revenue will go up for a few sectors at the same time revenues will fall where import of raw material costs will impact. 

 Corporate borrowings might get slow since expensive business expansion might be a wrong decision. But among all these negative and volatile hiccups the long-term factors of the Indian economy remain strong. We are a similar phase of 2011 to 2013 when the RBI took aggressive calls on interest rate hikes and went with 13 interest rate hikes on a continuous basis. We had higher inflation and Sensex was around 12000 to 16000 levels.   But we are not a situation of coal scam, 2G scam, scam in direct benefit transfer, or rising NPA during that time.  U.S interest rate hike is going ahead towards 2005-06 levels and this historic segment is being ignored.

 We don’t have any of the above negative bullets under our arms in the current scenario. Hence apart from the inflation worries, we don’t have any domestic reasons to worry about. This is true that we will find extensive pressure from global inflation and interest rates will increase to control inflation so India to manage the currency and interest rates impact.

 Those who are thinking that the market should have come down and Nifty should touch 13000 levels well you need to find 5 valid unique reasons for the fall. I bet you will never find such rationales. You may not trust Indian markets and you might best friend of Mr Bear but the global rating agencies have significant trust in Indian markets  The big three rating agencies — Fitch, Moody’s and S&P — all have a stable outlook on India. This is the very reason why the Nifty might have touched 20000 or 22000 levels if the war was not an issue.  Indian economy is very strong in the long term. The current problems are an opportunity to build long-term wealth. Every year cannot be like the phase of the past 2 years.

 Apart from this, there are no reasons to worry about the Indian economy. We have one of the strongest structural positions for 7% GDP growth over the next 10 years.    The coming next 10 years will be completely different from what we have gone through in the last 10 years.  Understanding this difference is the key to every long-term investment portfolio. This understanding will make you greedy when others are fearful.

 Midcaps will be one of the biggest gainers of the coming next decade. You will find significant transformation and opportunities for the midcap segment. The analyst community might be of the view that midcaps will have huge pain when we have high inflation well, that is a short-term phase. They have significant pricing leeway for their products which makes them stronger in the long term. Further Technology has changed the business process of midcaps. For PE and VC midcaps are the flavours since they find exponential growth opportunities in the space. The Hype for midcaps valuations has come down. In terms of the price points for a lot of the sectors, there is much more margin of safety today in terms of the valuations. The current volatility and pressure on the midcaps are mostly driven by the external environment and have less to do with internal factors.

1)      Laws like NCLT protect against foul plays by corporates

2)      Govt has already slashed Corporate tax rate

3)      GST plugs the loopholes in taxation

4)      Online linkage of Indirect and Direct taxes leads to significant improvisation in the business process

5)      Relaxed norms of IPO ( as an exit strategy) bring significant opportunity  for the midcap

6)      Relaxed Funding Norm and easy availability of various forms of credit from the government is an opportunity and survival mode for the SME segment

7)      China +1 strategy followed with a young working population

8)      India is soon going to have 100 unicorns in Fy-23. This accentuates the potential growth of the midcap space.

 When one looks ahead at the current hiccups in midcap space one will find the strength in the core fundamentals of the midcaps, the value definitely will emerge as far as the sector is concerned. The current situation of midcaps is an opportunity to invest and derive value over the long term. We all know that without midcaps one cannot derive alpha in one's portfolio as well as in financial planning.

 Coming to the last part when FII' s will be coming back chasing Indian equities, well for that we need to dig into the history.   

 The U.S kept increasing its interest rates from 2005 to 2006-07 before making the plunge. When the interest rates climb then investing in equities does not remain attractive and that is the place when the comeback chasing emerging markets in search of return.  

The below two charts depicts the story of U.S Interest hikes and simultaneously  FII's investments in India.

Hence if the U.S market falls and becomes flat and does not generate the returns as expected then the money starts flowing into those countries where the stocks provide healthy long-term growth prospects.  Now with strong rationales of India in hand, we find that post-war the rally and growth prospect for India will not be very high but will be an exponential best phase for the Indian capital market.

 The current scenario is an opportunity for long-term wealth creation which is getting hidden within the fear rumours of the market falling under recession.