The investment landscape in India has seen a notable trend in recent years, with Domestic Institutional Investors (DIIs) showing robust investment flows, while Foreign Portfolio Investor (FPI) flows have been relatively subdued due to global factors like rising interest rates. DIIs have demonstrated consistent investment, amounting to $20.2 billion in 2023, adding to the $35.8 billion in 2022. Conversely, FPI flows have been limited, reaching $12.8 billion this year, an improvement from the $16.5 billion outflow in 2022. Consequently, FPI ownership in Indian equities has reached its lowest point in a decade.
Despite the consensus expectation of moderate equity returns in 2023 due to factors like rising global interest rates, limited valuation potential, and elevated crude prices amid geopolitical tensions, India's financial markets outperformed predictions. The Sensex delivered a total return of 19.1%, mainly propelled by earnings growth. Moreover, the BSE Midcap and BSE Smallcap indices soared, delivering returns of 44.7% and 46.7%, respectively.
The returns in larger and mid-cap indices were primarily driven by earnings growth rather than an increase in earnings multiples. This indicates a strengthening earnings cycle that began in FY22. Conversely, small and mid-cap stocks outperformed their earnings growth, partly due to increased flows into these segments. Over the past three years, the cumulative share of flows into small and mid-cap categories has exceeded their Asset Under Management (AUM) share by 28.3% against an AUM share of 19%.
Given the historical returns in comparison to earnings growth, large-cap stocks present a favorable risk-reward profile. This analysis suggests that large-cap stocks could offer appealing prospects moving forward.
(With Agency Inputs)
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