Despite explicit signs of weakness in the domestic economy, foreign investors have been keen on India story as strong inflow of overseas investment was witnessed in FY20.
As per National Securities Depository Limited's (NSDL) data, FPIs sold in the Indian debt and equity market only in the month of July, August and December (so far) in FY20.
November 2019 saw the highest inflow of foreign funds to the tune of Rs 22,999 crore in FY20, followed by April (Rs 16,728 crore) and October (Rs 16,069 crore), NSDL data showed.
Market experts point out that the FPIs have a long-term positive view on the market as they expect a revival in the economy from the beginning of the first quarter of FY21.
With good monsoon, robust FDI flow and the government's measures to support the economy, the rupee is likely to gain strength, going forward. All this is giving hope to foreign investors.
In the financial year, healthcare services, household and personal products, insurance and media saw a sustained inflow of foreign fund, while banks, NBFCs, capital goods, consumer durables, metals and mining, oil & gas and telecom were the sectors that saw the revival of a positive trend.
On the other hand, pharmaceuticals & biotechnology, software & services, food, beverages & tobacco and transportation have been the sectors that have witnessed continuous selling by FPIs in FY20.
Will the trend continue?
Experts point out that a major chunk of foreign funds was invested into a handful of Nifty50 stocks. Flows in FY20 have been very concentrated which could, in fact, broaden in FY21.
Expert: Aditya Narain, Head Of Research, Edelweiss Financial Services
"We should see the continuation of the trend, maybe not as dramatic as the current year," said Narain.
The expectation of lower policy rates is still there despite an interruption which should help in attracting foreign funds. However, economic recovery, asset quality and asset revival in real estate are the factors that will have a great say in inflows.
Expert: Rusmik Oza, Senior VP & Head of Fundamental Research, Kotak Securities
"We feel FY21 could be different than FY20 as cyclical tailwinds and consumption growth numbers may see a revival due to lower base. Improvement in the US-China trade war could improve sentiment and make an investment case towards some of the old economy sectors like automobiles, oil & gas and metals & mining," said Oza.
Oza is of the view that corporate banks and larger NBFCs could attract fresh investments due to likely improvement in future earnings.
"The recent developments in the Indian wireless space offers promise a phase of strong multi-year EBITDA growth, driving return to healthy return ratios. Here, Bharti Airtel and Reliance Industries could be in limelight due to potential jump in earnings and see further participation from institutional investors," Oza pointed out.
The weakness in the domestic economy may play a spoilsport so investment growth is unlikely to pick up soon.
"Capital goods companies could remain under wait-and-watch mode and see investor interest only when we see green shoots and improvement on the ground level," Oza said.
"Some of the sectors like consumer staples, consumer durables, healthcare and insurance which have done exceptionally well in FY20 would likely take a back seat in FY21 as valuations are now running far ahead of fundamentals. Most likely beaten-down sectors of FY20 and select PSUs (which could be probable privatisation candidates) could outperform in FY21 on the low base and knocked down valuations," Oza added.
Expert: Santosh Meena, Senior Analyst, TradingBells
Pharma stocks may continue its bullish momentum in the coming year while insurance and other parts of healthcare space may see some consolidation after a period of outperformance.
In household and personal care space, stock-specific outperformance may continue where fund flow may shift from expensive stocks to some value midcap and SmallCap stocks.
Banking and NBFC stocks may continue to attract fund flows amid low-interest-rate environment whereas capital goods sector could surprise in the upside if there will be any recovery in the economic growth where upcoming budget will be important for capital goods space because there is a need of both private and public CAPEX to pick up for any meaningful recovery in the economy. Oil and Gas sector may also do well if there will be any improvement in the industrial activities.
The metal and mining sector may also see some improvement amid easing US-china trade tension but overall performance is likely to remain moderate.
In the telecom sector, stock-specific fund inflows will continue where Reliance is likely to hold its leadership.
Morgan Stanley sees more foreign flows coming in
Foreign financial firm Morgan Stanley is of the view that the Indian market is set to see more foreign funds after the confirmation on the implementation of the FPI limit increase. Besides, this sets the stage for MSCI India's weight to rise in MSCI's May 2020 review.
"The Finance Minister on December 13 confirmed the implementation of the budget announcement of increasing the statutory FPI limit in a company from 24 percent to the sectoral foreign investment limit, effective April 1, 2020. This implementation has far-reaching effects on India's free float, its weight in the MSCI indices, foreign flows, and supply of equity," Morgan Stanley said.
Morgan Stanley expects MSCI India's weight to rise by about 70bp in the semiannual index review of May 2020, implying passive flows of $2.5 billion.