Sunil Koul: FII Interest May Boost India’s Underperforming Market

After a period of relative underperformance compared to its global counterparts, India’s equity markets appear ready for a rebound. Sunil Koul notes that improving corporate earnings and revived foreign interest are key factors contributing to this potential recovery.

Global Rally Leaves India Behind — For Now

In a recent interview with ET Now, Sunil Koul from Goldman Sachs expressed that India has fallen behind during the significant market uptrend seen in many global and emerging markets this year. “It’s true that many markets globally and in emerging regions are up approximately 30% year to date, while India has lagged,” he remarked.

Koul attributed this lag to a decline in India’s corporate earnings over the past year, coupled with inflated valuations at the onset of this period. “The combination of high valuations and earnings declining for a year has affected India’s performance, while other economies have benefited from stronger policy drivers,” he explained.

However, a shift may be underway. “Fundamentally, we are starts to see signs of reversal or stabilization in corporate earnings. The recent quarterly results were quite strong, with particular upgrades noted in the financial sector,” Koul added.

According to him, a revival in earnings could attract back foreign institutional investors (FIIs), positioning India for better performance in the year ahead.

FII Flows May Return as Valuations Ease

The market has observed consistent FII inflows recently, and Koul anticipates that this trend may continue as India’s fundamentals improve. “We certainly hope for that, especially considering the starting point… Since the market began recovering globally, we’ve seen around $45 billion in net inflows from the lows in April, yet India is still at a net minus $16 billion year to date,” he pointed out.

Koul also highlighted that India remains one of the most underrepresented regions in emerging market portfolios. “Current allocations to India are at nearly two-decade lows. As corporate earnings recover, portfolio managers may need to adjust these allocations, leading to enhanced inflows in India,” he noted.

Why a Broader EM Rotation May Now Favor India

Koul drew comparisons from previous market behaviors, suggesting that global investors tend to rotate through emerging markets as opportunities shift. “This year, there has been a clear trend of diversifying away from U.S. equity markets,” he explained, citing slowing U.S. growth, potential rate cuts from the Federal Reserve, and a weakening dollar as favorable conditions for emerging markets.

“The non-recessionary environment of Fed cuts tends to be beneficial for asset markets, including emerging markets. The dollar remains approximately 15% overvalued based on our analysis. If the Fed continues to cut rates as anticipated and the dollar remains weak, this will create a favorable environment for emerging market equities,” he elaborated.

Throughout the year, investor focus has shifted from European markets to Latin America, then to Asia and South Africa, driven by changing catalysts. “Currently, the markets that have lagged include India and certain areas in the Middle East. While I am cautious about the Middle East due to weaker oil forecasts, India shows promise as a potential catch-up story,” Koul stated.

“As we mentioned, valuations are still somewhat high, but they are more reasonable than they were a year ago. With inflows beginning to return, we could be setting up for a substantial rally in the near future,” he concluded.

What are your thoughts on the future of India’s equity markets?