Time to re-evaluate your portfolio : Improving Inflows

The attractiveness of the Indian markets is far from ebbing out. In the beginning of 2024 itself, there is another favorable development regarding the Indian markets. Bloomberg proposed to include India FAR (fully accessible route) government securities in the Bloomberg EM Local Currency Index. Quite naturally, this will ensure flows into the Indian markets. Capital inflows are likely to change the dynamics of the Indian markets as it will impact not only asset prices but also investors’ sentiment. It is also the time to re-evaluate your portfolio composition bearing in mind new realities in the markets.

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Changing macro situation

Post the Covid-19 pandemic, the global economy has seen many changes. After infusing high liquidity to thwart slowdown, central banks in many parts of the world especially the US went all out to curtail inflation. Interest rates were raised, which in turn, strengthened the dollar. Now, inflation is falling. A cut in policy interest rates may be announced this year in the US. As a result, investors may look for better alternatives which pay higher returns. The Dollar index—a measure of the US dollar against a basket of seven major currencies—may fall–it may fall lower than the psychologically-important level of 100. Historically, in such a phase of relatively weak dollar, money flows into emerging markets among other risky assets.

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Money flows

The fundamentals of the Indian markets are stronger than its peers in emerging markets. As a result, the pace of flows into Indian equities may sustain. The exact quantum of the money flowing into the Indian equities will depend on the pace and quantum of interest rate cuts in the US, relative valuation of emerging markets equities, expected earnings growth in respective markets, among other factors. Foreign portfolio investments (FPI) were volatile in Indian equities through the CY2023. But in December 2023, there was remarkable jump in net investments to Rs 66,135 crore, closing the year with net inflows of Rs 171,107 crore.

Bond markets too may see significant inflows this year. The inclusion of the Indian government securities in the Bloomberg EM Local Currency Index may see limited inflows of money into India. This is because industry estimates reveal that there are relatively less assets benchmarked against the Bloomberg indices suit. However, this should be construed as a more sentiment booster after the inclusion of Indian FAR G-sec by J P Morgan into the Government Bond Index-Emerging Markets (GBI-EM) global index. Estimates point out that this inclusion alone is likely to bring flows of around US$20-25 billion to the Indian bond markets. While Bloomberg index inclusion takes place in five months starting September 2024, the JP Morgan index inclusion begins in June 2024 and over 10 months the weightage of the Indian bonds in the index will increase and reach the designated level.????

The flow of news around this should also make other index creators consider inclusion of Indian G-sec in their bond indices. This will add to the quantum of money flowing into India.

Though equities and bond markets attract money, inflows from foreign direct investments (FDI) are large and are invested with a long-term view. At the turn of the century, FDI in India stood at $2.2 billion in FY2000. FDI inflows of $85 billion made a high in FY 2021-2022. During FY 2022-23, FDI inflow of USD 71 billion (provisional figure) has been reported. During the current financial year, 2023-24 (up-to September 2023) FDI worth USD 33 billion has been reported. (Source: https://pib.gov.in/PressReleasePage.aspx?PRID=1990377)

The Indian government’s various pro-growth and long-term policies such as performance linked incentives, and PM Gati-Shakti are likely to further boost FDI. Besides, China-plus-one doctrine should work in favor of India. A stable pro-growth government post the Lok Sabha election should further increase flows in India.

The benefits

These factors indicate that the flow of money into Indian assets will improve further. So, investors need to change the composition of their portfolios to benefit from increasing flows. Investors should add duration funds to their fixed income portfolio. One can invest in long-term G-sec, long duration debt funds or in Gilt funds.

Foreign portfolios investors may opt for large-caps and relatively larger mid-cap companies in their portfolios. In this context, savvy Indian investors may invest in equities by increasing exposure to companies which will benefit from the increase in flows. Investors can consider investments in attractively-valued companies in the manufacturing sector also.

On the whole, investors need to be patient. They can recalibrate their portfolios by incorporating these elements. But they need to have a long-term vision of at least three years to benefit from these developments.