FII Confidence in India Wavers Amid Earnings Slowdown, Says Nepean Capital
Gautam Trivedi of Nepean Capital highlights a stark contrast between US and Indian markets. US companies project $4 trillion in total spending by 2025, including $1.7 trillion in dividends and buybacks for 2024, showcasing market resilience. In contrast, Indian markets face FII challenges with a 200-250 basis point underweight compared to the MSCI Emerging Market Index. India's index weightage has dropped from 21% to 15.7%, with FIIs selling $17 billion year-to-date. High valuations and an 18-month earnings slowdown are key concerns. Potential catalysts for FII return include improved earnings, GST cuts, and continued urban sales growth. The Indian IT sector faces challenges, while AI and power sectors show promise. Optimism for the latter half of the year stems from expected rate cuts, GST reductions, and PSU pay hikes.
*this image is generated using AI for illustrative purposes only.
US Market Resilience vs. Indian Market Underweight
Gautam Trivedi from Nepean Capital has highlighted a stark contrast in investor sentiment between the US and Indian markets, shedding light on the current challenges facing Foreign Institutional Investors (FIIs) in India.
US Market Strength
The US economy is showing remarkable resilience, with S&P 500 companies projected to engage in significant financial activities:
| Activity | Amount (USD) | Year |
|---|---|---|
| Total Spending | 4.00 trillion | 2025 |
| Dividends & Share Buybacks | 1.70 trillion | 2024 |
This total spending, which includes capex, R&D, share buybacks, dividends, and M&A activity, is expected to exceed India's current GDP. Corporate spending is anticipated to rise by 11% next year, underscoring the robust health of the US market.
Indian Market Challenges
In contrast, the Indian market is facing headwinds in terms of FII confidence:
- Global investors are underweight India by 200-250 basis points compared to the MSCI Emerging Market Index.
- India's weightage in the index has dropped from 21% to 15.7%.
- FIIs have sold $17.00 billion year-to-date.
Key Concerns for India
The primary concerns for FIIs are:
- High valuations
- 18-month earnings slowdown
India currently trades at 22-23 times one-year forward earnings, which is comparable to the S&P 500. However, the lack of earnings growth is deterring FII investment.
Potential Catalysts for FII Return
Trivedi suggests that FII confidence may return if:
- Earnings improve
- GST cuts are implemented
- Recent urban sales growth continues
Sector-Specific Challenges and Opportunities
Indian IT Sector:
- Faces challenges from H-1B visa restrictions
- Potential disruption from AI advancements
- Stock performance has been stagnant over the past five years
Emerging Opportunities:
Investors have shown interest in:
- India's AI ecosystem
- Power sector opportunities
Outlook for the Second Half
There's optimism for the latter half of the year, supported by expectations of:
- Rate cuts
- GST reductions
- Upcoming PSU pay hikes
While challenges persist, these factors could potentially boost market sentiment and economic activity in India.
In conclusion, while the US market demonstrates strong corporate spending and investor confidence, India faces a temporary setback in FII interest. However, with potential catalysts on the horizon, the situation could improve if earnings growth resumes and policy measures support economic expansion.
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