India will stay the top market for 20 more years, says Vikas Khemani

Foreign flows to Indian stock markets have started to trickle in as geopolitical developments back home and US tariff-related fears have abated. VIKAS KHEMANI, founder, Carnelian Asset Management, tells Puneet Wadhwa in a telephonic interview that global investors are significantly underweight on India, and that this will change over the next five to 10 years. He expects India’s equity weight in major global fund allocations to increase over the next decade, which could result in an inflow of $1.5 trillion — a substantial figure given India’s current market capitalisation of $5 trillion. Edited excerpts:

 

Is a bottom now firmly in place for the markets as regards tariff tantrums?

 

It is very clear by now that the tariff tantrum, as you rightly called it, didn’t have much traction. The US cannot bring back manufacturing, and tariffs only create inflation. Tariff talks are a negotiating tactic to get US companies better access, especially in China. I’m sure most of this is behind us, and the markets will discount any future developments on this front. That said, markets may take time to normalise due to other factors as well; until then, they are likely to remain range-bound.

 

Are there any stocks/sectors that deserve a rerating from here on out?

 

Interest rates coming down should generally lead to a rerating of the markets. Banking, non-banking financial companies, and industrials in particular will do well. We think many public sector banks with strong fundamentals will see a rerating. Defence stocks could come back in focus due to the recent India-Pakistan conflict.

 

What’s an ideal portfolio construct for a first-time investor as things stand? Is diversification to international markets advisable?

 

For a first-time investor, a well-diversified portfolio across sectors and market capitalisations is the best option as things stand. It should focus on India’s growth story across banking, financial services and insurance, manufacturing, pharmaceutical, consumption, and the services sector.

 

India has been the best-performing market over the past 20 years, and I think it will remain so over the next 20 years. When you have the best market at your doorstep, international diversification is a distraction.

 

Do you think foreign investors are now looking at India with a renewed sense of optimism, or will China steal the thunder?

 

We’ve said repeatedly over the past year that foreign flows are a function of global interest rates. As uncertainty over US Federal Reserve rates eases, India will receive large inflows.

 

We expect India’s equity weight in major global fund allocations to increase over the next decade, which could result in an inflow of $1.5 trillion (on the current base) — a substantial amount given India’s market capitalisation of $5 trillion. It’s just a matter of time. Similarly, domestic flows will continue over the next decade. Domestic household exposure to equity is still around 5 per cent, and this can rise to 15 per cent over the next 10 years.

 

What has been your investment strategy amid the recent market turmoil?

 

Our strategy across market cycles has been to invest in quality growth companies led by strong management teams, where stocks are available at reasonable valuations. During this period of turmoil, we saw several opportunities offering valuation comfort. We look for companies that offer both accelerated earnings growth and potential for rerating. When both come together, there is strong return potential. We’ve been buying banking stocks during the correction.

 

Which stocks/sectors would you add to if the markets were to react negatively to the India-Pakistan geopolitical situation, if it erupts again?

 

Our preferred stocks and sectors don’t change frequently. If markets fall for a temporary reason that doesn’t affect a company fundamentally, it is often the best time to buy. Broad-based corrections result in indiscriminate selling. One should look for stocks that have corrected due to sentiment but not due to fundamentals. Banking, manufacturing, pharmaceutical, and industrials are segments we currently favour. 

INDIA’S $1.5 TRILLION INFLOW: THE NEXT DECADE

 

·         Foreign flows depend on US interest rate clarity

 

·         India’s share in global funds will rise sharply

 

·         Expected inflow: $1.5 trillion on a $5 trillion market cap

 

·         Domestic equity exposure could treble from 5% to 15%

 

·         It’s only a matter of time